Question

Hayden, Inc. produces two different products, Product A and Product B. Hayden uses a traditional volume-based costing system in which direct labor hours are the allocation base. Hayden is considering switching to an ABC system by splitting its manufacturing overhead cost across three activities: Engineering, Manufacturing, and Inspection. The cost of each activity and usage of the activity drivers are as follows:

	Cost		Usage by Product A	Usage by Product B
Engineering (Engineering Hours)	$	990,000	4,600	5,400
Manufacturing (Direct Labor Hours)	$	1,171,800	490,000	490,000
Inspection (Batches)	$	759,000	6,600	5,500

Hayden manufactures 14,900 units of Product A and 7,450 units of Product B per month.

Required:
a. Calculate the predetermined overhead rate under the traditional costing system. (Round your answer to 2 decimal places.)

b. Calculate the activity rate for Engineering. (Round your answer to 2 decimal places.)

c. Calculate the activity rate for Manufacturing. (Round your answer to 2 decimal places.)

d. Calculate the activity rate for Inspection.

e. Calculate the indirect manufacturing costs assigned to each unit of Product A under the traditional costing system. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

f. Calculate the indirect manufacturing costs assigned to each unit of Product B under the traditional costing system. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

   

g. Calculate the indirect manufacturing costs assigned to each unit of Product A under the ABC system. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

h. Calculate the indirect manufacturing costs assigned to each unit of Product B under the ABC system. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

i. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?

Answer 1

a)

Activity	Cost
Engineering	$                                            990,000
Manufacturing	$                                        1,171,800
Inspection	$                                            759,000
Total Indirect Cost	$                                        2,920,800
Direct Labours for A	490,000.00
Direct Labours for B	490,000.00
Total Direct Labours	980,000.00
Predetermined overhead rate = Total Indirect Cost/ Direct Hrs	$ 2.98

	Activity	Cost	Cost Driver	Activity by A	Activity by B	Total Activity	Activity Rate = Cost/ Total Activity
b	Engineering	$     990,000	Engineering Hours	4,600	5,400	10,000	$                           99.00
c	Manufacturing	$ 1,171,800	Direct Labor Hours	490,000	490,000	980,000	$                              1.20
d	Inspection	$     759,000	Batches	6,600	6,600	13,200	$                           57.50

e&f)

	Product A (e)	Product B (f)
Predetermined overhead rate	$                             2.98	$                   2.98
Labour Hrs	490,000.00	490,000.00
Total Cost	$             1,460,400.00	$ 1,460,400.00
Total Units	14900	7450
Cost Assigned per unit	$                           98.01	$              196.03

f )

Cost Driver	Activity by A	Activity Rate = Cost/ Total Activity	Cost Assigned to A
Engineering Hours	4,600	$                           99.00	$      455,400.00
Direct Labor Hours	490,000	$                              1.20	$      585,900.00
Batches	6,600	$                           57.50	$      379,500.00
Total Cost Assigned to A	$ 1,420,800.00
Units of A	14,900.00
Cost per unit of A	$                95.36

g)

Cost Driver	Activity by B	Activity Rate = Cost/ Total Activity	Cost Assigned to B
Engineering Hours	5,400	$                           99.00	$      534,600.00
Direct Labor Hours	490,000	$                              1.20	$      585,900.00
Batches	6,600	$                           57.50	$      379,500.00
Total Cost Assigned to B	$ 1,500,000.00
Units of B	7450
Cost per unit of B	$              201.34

i) Product A is over costed under traditional costing and Product B is under costed.

	Product A	Product B
Cost under Traditional Costing	$                98.01	$              196.03
Cost under ABC Costing	$                95.36	$              201.34