Question

Hazelnut Corp. manufactures lawn ornaments. It currently has two product lines, the basic and the luxury. Hazelnut has a total of $161,629 in overhead.

The company has identified the following information about its overhead activity cost pools and the two product lines:

Activity Cost Pools Cost Driver Cost Assigned

to Pool Quantity/Amount Consumed by

Basic Quantity/Amount Consumed by

Luxury

Materials handling Number of moves $ 4,134 13 moves 65 moves

Quality control Number of inspections $ 30,295 200 inspections 100 inspections

Machine maintenance Number of machine hours $ 127,200 5,200 machine hours 5,400 machine hours

Required:

1. Suppose Hazelnut used a traditional costing system with machine hours as the cost driver. Determine the amount of overhead assigned to each product line. (Do not round intermediate calculations and round your final answers to the nearest whole dollar amount.)

2. Calculate the activity rates for each cost pool in Hazelnut’s ABC system. (Round your answers to the nearest whole dollar.)

3. Calculate the amount of overhead that Hazelnut will assign to the basic line if it uses an ABC system. (Round your intermediate and final answers to the nearest whole dollar.)

4. Determine the amount of overhead Hazelnut will assign to the luxury line if it uses an ABC system. (Round your intermediate and final answers to the nearest whole dollar.)

5. Compare the results for a traditional system with that of an ABC system. Which do you think is more accurate?

Traditional System

ABC System

Answer 1

1)	overhead rate = overhead/total machine hours
		161,629/10600
		15.24802
	overhead assigned
	Basic	15.24802	*	5,200	=	79290
	luxury	15.24802	*	5,400	=	82339
	total overhead					161629
2)	Activity rates		cost	qty	activity rate
	materials handling		4,134	78	53	per move
	Quality control		30,295	300	100.9833	per inpection
	Machine maintenance		127,200	10600	12	per machine hour
			161,629
3)	Amount of overhead assigned to basic line
	Activity
			a	b	c=a*b
	activity		rate	a	overhead
	materials handling		53	13	689
	Quality control		100.9833	200	20196.67
	Machine maintenance		12	5,200	62400
	total				83286
4)	overhead assinged to luxury
	Activity
			a	b	c=a*b
	activity		rate		overhead
	materials handling		53	65	3445
	Quality control		100.9833	100	10098.33
	Machine maintenance		12	5,400	64800
	total				78343
5)	ABC is better as rates are based on actual activities
	thus assinged overhead is more accurate
					Basic	luxury
	Traditional				79290	82339
	ABC				83286	78343