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 $26.98 per unit, while product B has been assigned $15.22 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	$	172,000		Setup hours		2,000
Materials handling		162,000		Pounds of materials		18,000
Electric power		62,000		Kilowatt-hours		31,000

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		4,000			10,000
Direct materials cost	$	23,000		$	38,000
Direct labor cost	$	28,000		$	37,000
Number of setup hours		100			200
Pounds of materials used		2,000			2,000
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

Answer

	Deluxe	Standard
Per Unit Costs	$         20.40	$           11.82

Calculations:

	Deluxe	Standard
Direct material	$ 23,000.00	$   38,000.00
Direct Labor	$ 28,000.00	$   37,000.00
Overheads	$ 30,600.00	$   43,200.00
Total	$ 81,600.00	$ 118,200.00
Units	$   4,000.00	$   10,000.00
Per Unit Costs	$         20.40	$           11.82

	Costs	Total activity	Activity Rate	Actual Usage - A	Actual Usage - B	Overheads - A	Overheads - B
Machine setup	$ 172,000	2,000	$          86.00	100	200	$             8,600	$          17,200
Materials handling	$ 162,000	18,000	$            9.00	2,000	2,000	$           18,000	$          18,000
Electric power	$   62,000	31,000	$            2.00	2,000	4,000	$             4,000	$             8,000
Total Over heads	$          30,600	$          43,200

In case of any doubt, please comment.