Question

In: Accounting

Hakara Company has been using direct labor costs as the basis for assigning overhead to its...

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.)

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Expert Solution

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.


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