Harrison Company makes two products and uses a conventional costing system in wh

Question

Harrison Company makes two products and uses a conventional costing system in which a single plant-wide predetermined overhead rate is computed based on direct labor-hours. Data for the two products for the upcoming year follow:


Rascon Parcel
Direct materials cost per unit....................... $ 13.50 $ 22.40
Direct labor cost per unit................................$ 6.00 $ 3.00
Direct labor-hours per unit............................ 0.40 0.20
Number of units produced............................20,000 80,000


These products are customized to some degree for specific customers.

Required:
1. The company's manufacturing overhead costs for the year are expected to be $576,000. Using the-company's conventional costing system, compute the unit product costs for the two products.

2. Management is considering an activity-based costing system in which half of the overhead would continue to be allocated on the basis of direct labor-hours and half would be allocated on the basis of engineering design time. This time is expected to be distributed as follows during the upcoming year:


Rascon Parcel Total
Engineering design time (in hours)........ 3,000 3,000 6,000


Compute the unit product costs for the two products using the proposed ABC system.

3. Explain why the product costs differ between the two systems.

Explanation / Answer

Total direct labor-hours=0.40*20000+0.20*80000 = 24,000
Overhead rate=Overhead costs/Totaldirect laborhours=$576000/24,000=$24/hr

Unit productcost for A (let A be the 1st product)
=Material cost/unit+Overhead cost/unit
= $13.50/unit + $24/hr*0.40 hr/unit
= $13.50/unit + $9.6/unit
= $23.10/unit

Similarly, unit product cost for B (let B be the 2nd product)
=Material cost/unit+Overhead cost/unit
= $22.40/unit + $24/hr*0.20 hr/unit
= $22.40/unit + $4.80/unit
= $27.20/unit

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