Harris systems specializes in servers for workgroup,e-commerce, and ERP applicat

Question

Harris systems specializes in servers for workgroup,e-commerce, and ERP applications.The company's original job costing system has two direct cost categories:direct materials and direct labor.Overhead is allocated to jobs at the single rate of $22 per direct labor hour.A task force headed by Harris's CFO recently designed an ABC system with four activities.The ABC system remains the current system's two direct cost categories.Thus,it budgets only overhead costs for each activity.Pertinent data follow:

Activity Allocation base Cost allocation rate

Materials handling Number of parts $ 0.85
Machine setup Number of setup 500
Assembling Assembling hours 80
Shipping Number of shipment 1,500

Harris systems has been awarded two new contracts, which will be produced as Job A and B.Budget data relating to the contract follow:

Job A Job B
number of parts 15,000 2,000
number of setups 6 4
number of assembling hours 1,500 200
number of shipments 1 1
total direct labor hour 8,000 600
number of output units 100 10
direct materials cost 220,000 30,000
direct labor cost 160,000 12,000

Requirement:
1.compute the product cost per unit for each job,using the original costing system(with two direct cost categories and a single overhead allocation rate).
2. suppose Harris systems adopts the ABC system.compute cost per unit for each job using ABC.
3. which costing system more accurate assigns to jobs the costs of the resource consumed to produce them?Explain.
4. A dependable company has offered to produce both jobs for Harris for $5,400 per output units. Harris may out source (but from the outside company)either Job A only,Job B only,or both job.which course of action will Harris's managers take if they base their decision on (a) the original system?(b)ABC system costs? which course of action will yield more income?explain.

Explanation / Answer

Job - A

Job - B

Job - A

Job - B

Job - A

Job - B

Costs

Costs

Job - A

Job - B

Units - (A) 100 10 Total Direct Labour Hours - (B) 8000 600 Direct Labour Cost 160000 12000 Direct Material Cost 220000 30000 Overhead ($22 * Direct labour hours)or(22*B) 176000 13200 Total Cost - (C) 556000 55200 Cost Per Unit = (C / A) $5,560 $5,520

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