Question

Hazelnut Corp. manufactures lawn ornaments. It currently has two product lines, the basic and the luxury. Hazelnut has a total of $171,500 in overhead. The company has identified the following information about its overhead activity cost pools and the two product lines: Activity Cost Pools Cost Driver Materials handling Number of moves Quality control Number of inspections Machine maintenance Number of machine hours Cost Assigned to Pool $ 14,000 S 37,500 $120.000 Quantity/Amount Quantity/Amount consumed by consumed by Basic Luxury 20 noves 50 moves 250 inspections 125 inspections 5.000 machine hours 5,000 machine hours Required: 1. Suppose Hazelnut used a traditional costing system with machine hours as the cost driver. Determine the amount of overhead assigned to each product line. (Do not round intermediate calculations and round your final answers to the nearest whole dollar amount.) Basic Model Luxury Model Overhead Assigned Overhead Assigned

Answer 1

Traditional_coot system Toral Overhead - $ 191,500 Basic Moded (Overhead assigned) ance Basic Malling hours Toral Overhead X - Toral mackimo hours $191,500 x 5000 10000 *$85,750, Luxury_model = 8191500 x 5000 70000 885750 Since Bom model had 5000 hours comumbhion. So 'Overhead a divided equelly. Activity Rakar Toral Makererat Herdling $14000 Materiala = $200 | handling Toral number of moved 70 per Quality Connol quality Toral4mspection) cout $39500 S 100 pour Toral number of Commor imspection inspections moved 375 Mochime Maino hemorco Toral Machine Maimemany cout Toral machine hours $ 120,000 70000 $12. Des machine how

Overhead assigned to Basic Lime Malonials No.01 Moved by * hale fose move handling Basic Lime > 20 move x 200 per move >> $ 4000 quality comkol - Noof inspection by Basicline X - 250 x 100 3 $25000 Rale per inspection Machine Maimbeerences NO - Machine hows x Rave per machine by Bawit-time howe 5000 x $12 3) $ 60,000 I Toral Over head material quality Machine Gadisoned to B220 >> - Maintenance Handling a Time E $4000 + $ 25000 7500000 Cos 889000 4. Ovechead Qouigned to Luxury Lime and abroad Malesial handling. So move. X 200 remove $10,000 Quality Commol 2 250 125 x 100 per = $ 12500 imspections inspection Machine Maintenance a 5000 machine x 642. = $ 60,000 - Total Ovesehead Assig med: - $ 82,500 hour machine how

5. As per Traditional cost system:-

Overhead cost assigned to basic line= $85,750

And,   Overhead cost assigned to luxury line = $ 85,750

As per ABC system:-

Overhead cost assigned to basic line= $89,000

And,   Overhead cost assigned to luxury line = $ 82,500

As from the above we can see:-

• that as per traditional cost system overhead are equally distributed, however in ABC system base line has higher overhead cost.
• Despite of having different inspection cost and different moves the cost are same in traditional cost system.
• Traditional cost system takes only one parameter and distribute the whole cost on single parameter. However it is not so in ABC system as it consider each and every parameter to distribute the costs.

Hence ABC system shows more accurate distribution of cost.