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 $24.82 per unit while product B has been assigned $13.58 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 Driver	Driver Consumption
Machine setup	158,000	Setup hours	2,000
Materials handling	112,000	Pounds of materials	16,000
Electric Power	25,000	Kilowatt-hours	25,000

The following cost information pertains to the production of A and B, just two of its many products:

	A	B
Number of units produced	5,000	10,000
Direct materials cost	$32,000	$41,000
Direct labor cost	$41,000	$38,000
Number of setup hours	100	200
Pounds of materials used	1,000	1,000
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.)

	Cost per Unit
Product A
Product B

Answer 1

The correct answer is :

	Cost per Unit
Product A	17.98
Product B	10.58

Note :

1. Activity Rates:

Cost Pools	Activity Costs	Cost Driver	Driver Consumption	Activity Rate ( Activity Cost / Consumption)
Machine setup	1,58,000	Setup hours	2,000	$ 79
Materials handling	1,12,000	Pounds of materials	16,000	$ 7
Electric Power	25,000	Kilowatt-hours	25,000	$ 1

2. Overhead Cost :

A
	Activity	Activity Rate	Overhead ( Activity Rate * Activity)
Number of setup hours	100	79	7,900
Pounds of materials used	1,000	7	7,000
Kilowatt-hours	2,000	1	2,000
			16,900

B
	Activity	Activity Rate	Overhead ( Activity Rate * Activity)
Number of setup hours	200	79	15,800
Pounds of materials used	1,000	7	7,000
Kilowatt-hours	4,000	1	4,000
			26,800

3. Unit Cost :Product A

Direct materials cost	32,000
Direct labor cost	41,000
Overhead	16,900
Total Cost	89,900
Number of units produced	5,000
Unit Cost ( Total Cost / Total Units)	17.98

Product B:

Direct materials cost	41,000
Direct labor cost	38,000
Overhead	26,800
Total Cost	1,05,800
Number of units produced	10,000
Unit Cost ( Total Cost / Total Units)	10.58