Question

Hazelnut Corp. manufactures lawn ornaments. It currently has two product lines, the basic and the luxury. Hazelnut has a total of $181,011 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		$	3,036		12 moves	54 moves
Quality control	Number of inspections		$	29,575		230 inspections	95 inspections
Machine maintenance	Number of machine hours		$	148,400		4,700 machine hours	5,900 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.



3. Calculate the amount of overhead that Hazelnut will assign to the basic line if it uses an ABC system.



4. Determine the amount of overhead Hazelnut will assign to the luxury line if it uses an ABC system.



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

Hazelnut Corp. manufactures lawn ornaments. It currently has two product lines, the basic and the luxury. Hazelnut has a total of $181,011 in overhead.

Answer 1

1)	overhead rate = overhead/total machine hours
		181,011/(4,700+5,900)
		17.07651
	overhead assigned
	Basic	17.07651	*	4,700	=	80260
	luxury	17.07651	*	5,900	=	100751
	total overhead					181011
2)	Activity rates		cost	qty	activity rate
	materials handling		3,036	66	46	per move
	Quality control		29,575	325	91	per inpection
	Machine maintenance		148,400	10600	14	per machine hour
3)	Amount of overhead assigned to basic line
	Activity
			a	b	c=a*b
	activity		rate		overhead
	materials handling		46	12	552
	Quality control		91	230	20930
	Machine maintenance		14	4,700	65800
	total				87282
4)	overhead assinged to luxury
	Activity
			a	b	c=a*b
	activity		rate		overhead
	materials handling		46	54	2484
	Quality control		91	95	8645
	Machine maintenance		14	5,900	82600
	total				93729
5)	ABC is better as rates are based on actual activities
	thus assinged overhead is more accurate