# 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 \$28.26 per unit, while product B has been assigned \$11.09 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 \$ 128,000 Setup hours 2,000 Materials handling 84,000 Pounds of materials 14,000 Electric power 33,000 Kilowatt-hours 33,000

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 \$ 36,000 \$ 25,000 Direct labor cost \$ 34,000 \$ 36,000 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.)

Working Notes:
Calculation of the Cost Driver Rate
Cost Driver Rate = Activity Cost / Cost Driver
Activity Cost / Cost Driver =
Activity Cost Driver   Activity Cost   "/"   Cost Driver " = " To Cost Driver Rate
Machine Setups Setup Hours \$                     1,28,000 "/"                            2,000 " = " To   \$                    64.00
Material Handling Pounds of Material   \$                         84,000 "/"                         14,000 " = " To   \$                      6.00
Electric Power Kilowatt - Hours   \$                         33,000 "/"                         33,000 " = " To   \$                      1.00
Total   \$                     2,45,000
Solution : 1
Calculation of the Unit Cost of Product A
Activity Activity Used   "X " By Cost Driver rate   Cost
Direct Material Cost \$                   36,000
Direct Labor Cost \$                   34,000
Setup Hours                                    100 "X " By \$               64.00 \$                     6,400
Pounds of Material                                   1,000 "X " By \$                  6.00 \$                     6,000
Kilowatt - Hours                                   2,000 "X " By \$                  1.00 \$                     2,000
Total Cost \$                   84,400
Divide By "/" By
No. of Units Prodcued                          4,000
Per Unit Cost of Product A = \$                     21.10
Answer = Cost Per Unit = \$ 21.10
Solution : 2
Calculation of the Unit Cost of Product B
Activity Activity Used   "X " By Cost Driver rate   Cost
Direct Material Cost \$             25,000.00
Direct Labor Cost \$             36,000.00
Setup Hours                                    200 "X " By \$               64.00 \$                   12,800
Pounds of Material                                   1,000 "X " By \$                  6.00 \$                     6,000
Kilowatt - Hours                                   4,000 "X " By \$                  1.00 \$                     4,000
Total Cost \$                   83,800
Divide By "/" By
No. of Units Prodcued                       10,000
Per Unit Cost of Product A = \$                        8.38
Answer = Cost Per Unit = \$ 8.38
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