Question

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 $23.76 per unit, while product B has been assigned $9.73 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	$	248,000		Setup hours		4,000
Materials handling		162,000		Pounds of materials		18,000
Electric power		23,000		Kilowatt-hours		23,000

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		5,000			10,000
Direct materials cost	$	23,000		$	22,000
Direct labor cost	$	31,000		$	25,000
Number of setup hours		100			200
Pounds of materials used		2,000			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.)

Answer 1

Solution

	Product A	Product B
Total Cost per unit	$                    16.04	$                        7.24

Working

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Machine setup	Number of setup hour	$ 248,000	4000	$             62.00	Per setup hour
Material Handling	Number of pound of material	$ 162,000	18000	$               9.00	Per pound of material
Electric power	Number of Kilowatt-hour	$ 23,000	23000	$               1.00	Per Kilowatt-hour

.

Cost assigned to Product A
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$           62.00	100.00	$ 6,200
Material Handling	$             9.00	2,000.00	$ 18,000
Electric power	$             1.00	2,000.00	$ 2,000
Total Overheads assigned			$ 26,200
Production			5,000.00
Overhead cost per unit			$ 5.24

.

Cost assigned to Product B
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$           62.00	200	$ 12,400
Material Handling	$             9.00	1000	$ 9,000
Electric power	$             1.00	4000	$ 4,000
Total Overheads assigned			$ 25,400
Production			10,000.00
Overhead cost per unit			$                 2.54

.

	Product A	Product B
Direct material	$                      4.60	$                        2.20
Direct labor	$                      6.20	$                        2.50
Overheads	$                      5.24	$                        2.54
Total Cost per unit	$                    16.04	$                        7.24