Hakara Company has been using direct labor costs as the basi

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 $31.58 per unit while product B has been assigned $8.69 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 Driver

Driver Consumption

  Machine setup

$

198,000

Setup hours

2,000         

  Materials handling

168,000

Pounds of materials

21,000         

  Electric power

40,000

Kilowatt-hours

40,000   

The following cost information pertains to the production of A and B, just two of its many products:

A

B

  Number of units produced

4,000

20,000

  Direct materials cost

$

31,000

$

33,000

  Direct labor cost

$

33,000

$

33,000

  Number of setup hours

200

200

  Pounds of materials used

1,000

2,000

  Kilowatt-hours

4,000

4,000

1. Use activity-based costing to determine a unit cost for each product.

2. Comment on Managements belief that the ABC system will generate an overhead allocation that is more accurate than the volume based system currently in use.

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 $31.58 per unit while product B has been assigned $8.69 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 Driver Driver Consumption   Machine setup $ 198,000 Setup hours 2,000            Materials handling 168,000 Pounds of materials 21,000            Electric power 40,000 Kilowatt-hours 40,000

Solution

workings-1

Cost Pools

Activity Costs

Cost Driver

Driver Consumption

Activity Cost per unit($)

  Machine setup

$

198000

Setup hours

2000

99

  Materials handling

168000

Pounds of materials

21000

8

  Electric power

40000

Kilowatt-hours

40000

1

1.ans

Under ABC Costing

A

B

  Number of units produced

4,000

20,000

  Direct materials cost

$

31,000

$

33,000

  Direct labor cost

$

33,000

$

33,000

Machine Setup cost [200*99, 200*99]

$

19800

$

19800

  Pounds of materials used[1000*8;2000*8]

$

8,000

$

16,000

  Kilowatt-hours[4000*1;4000*1]

$

4000

$

4000

Total cost

$

95800

$

105800

2. ans

under volume based costing(absorption costing)

A

B

  Number of units produced

4,000

20,000

  Direct materials cost

$

31,000

$

33,000

  Direct labor cost

$

33,000

$

33,000

Overhead cost

$

126320

$

173800

Total cost

$

190,320

$

239,800

From the above we can say that total cost under ABC sytem is less than total cost under Volume based system currently in use. Therefore management is correct in their belief.

workings-1
Cost Pools	Activity Costs	Cost Driver	Driver Consumption	Activity Cost per unit($)
Machine setup	$	198000	Setup hours	2000	99
Materials handling		168000	Pounds of materials	21000	8
Electric power		40000	Kilowatt-hours	40000	1