Hakara Company has been using direct labor costs as the basis for assigning over
ID: 2610928 • Letter: H
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 $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
Explanation / Answer
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
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