Hakara Company has been using direct labor costs as the basis for assigning overhead to its many products. Under this allocation system, product A has been assigned overhead of $28.26 per unit, while product B has been assigned $11.09 per unit. Management feels that an ABC system will provide a more accurate allocation of the overhead costs and has collected the following cost pool and cost driver information:
Cost Pools | Activity Costs | Cost Drivers | Activity Driver Consumption | ||||
Machine setup | $ | 128,000 | Setup hours | 2,000 | |||
Materials handling | 84,000 | Pounds of materials | 14,000 | ||||
Electric power | 33,000 | Kilowatt-hours | 33,000 | ||||
The following cost information pertains to the production of A and B, just two of Hakara's many products:
A | B | |||||
Number of units produced | 4,000 | 10,000 | ||||
Direct materials cost | $ | 36,000 | $ | 25,000 | ||
Direct labor cost | $ | 34,000 | $ | 36,000 | ||
Number of setup hours | 100 | 200 | ||||
Pounds of materials used | 1,000 | 1,000 | ||||
Kilowatt-hours | 2,000 | 4,000 | ||||
Required:
1. Use activity-based costing to determine a unit cost for each product. (Round your final answers to 2 decimal places.)
Working Notes: | |||||||
Calculation of the Cost Driver Rate | |||||||
Cost Driver Rate = Activity Cost / Cost Driver | |||||||
Activity Cost / Cost Driver = | |||||||
Activity | Cost Driver | Activity Cost | "/" | Cost Driver | " = " To | Cost Driver Rate | |
Machine Setups | Setup Hours | $ 1,28,000 | "/" | 2,000 | " = " To | $ 64.00 | |
Material Handling | Pounds of Material | $ 84,000 | "/" | 14,000 | " = " To | $ 6.00 | |
Electric Power | Kilowatt - Hours | $ 33,000 | "/" | 33,000 | " = " To | $ 1.00 | |
Total | $ 2,45,000 | ||||||
Solution : 1 | |||||||
Calculation of the Unit Cost of Product A | |||||||
Activity | Activity Used | "X " By | Cost Driver rate | Cost | |||
Direct Material Cost | $ 36,000 | ||||||
Direct Labor Cost | $ 34,000 | ||||||
Overhead Cost: | |||||||
Setup Hours | 100 | "X " By | $ 64.00 | $ 6,400 | |||
Pounds of Material | 1,000 | "X " By | $ 6.00 | $ 6,000 | |||
Kilowatt - Hours | 2,000 | "X " By | $ 1.00 | $ 2,000 | |||
Total Cost | $ 84,400 | ||||||
Divide By | "/" By | ||||||
No. of Units Prodcued | 4,000 | ||||||
Per Unit Cost of Product A = | $ 21.10 | ||||||
Answer = Cost Per Unit = $ 21.10 | |||||||
Solution : 2 | |||||||
Calculation of the Unit Cost of Product B | |||||||
Activity | Activity Used | "X " By | Cost Driver rate | Cost | |||
Direct Material Cost | $ 25,000.00 | ||||||
Direct Labor Cost | $ 36,000.00 | ||||||
Overhead Cost: | |||||||
Setup Hours | 200 | "X " By | $ 64.00 | $ 12,800 | |||
Pounds of Material | 1,000 | "X " By | $ 6.00 | $ 6,000 | |||
Kilowatt - Hours | 4,000 | "X " By | $ 1.00 | $ 4,000 | |||
Total Cost | $ 83,800 | ||||||
Divide By | "/" By | ||||||
No. of Units Prodcued | 10,000 | ||||||
Per Unit Cost of Product A = | $ 8.38 | ||||||
Answer = Cost Per Unit = $ 8.38 | |||||||
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