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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 $23.76 per unit, while product B has been assigned $9.73 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 $ 248,000 Setup hours 4,000
Materials handling 162,000 Pounds of materials 18,000
Electric power 23,000 Kilowatt-hours 23,000

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 5,000 10,000
Direct materials cost $ 23,000 $ 22,000
Direct labor cost $ 31,000 $ 25,000
Number of setup hours 100 200
Pounds of materials used 2,000 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.)

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Solution

Product A Product B
Total Cost per unit $                    16.04 $                        7.24

Working

Calculation of Activity rates
Activity Cost Pool Activity driver Overhead Cost (A) Expected Activity (B) Activity rate (A/B)
Machine setup Number of setup hour $ 248,000 4000 $             62.00 Per setup hour
Material Handling Number of pound of material $ 162,000 18000 $               9.00 Per pound of material
Electric power Number of Kilowatt-hour $ 23,000 23000 $               1.00 Per Kilowatt-hour

.

Cost assigned to Product A
Activity name Activity Rates Activity ABC Cost
(A) (B) (A x B)
Machine setup $           62.00                      100.00 $ 6,200
Material Handling $             9.00                  2,000.00 $ 18,000
Electric power $             1.00                  2,000.00 $ 2,000
Total Overheads assigned $ 26,200
Production               5,000.00
Overhead cost per unit $ 5.24

.

Cost assigned to Product B
Activity name Activity Rates Activity ABC Cost
(A) (B) (A x B)
Machine setup $           62.00 200 $ 12,400
Material Handling $             9.00 1000 $ 9,000
Electric power $             1.00 4000 $ 4,000
Total Overheads assigned $ 25,400
Production             10,000.00
Overhead cost per unit $                 2.54

.

Product A Product B
Direct material $                      4.60 $                        2.20
Direct labor   $                      6.20 $                        2.50
Overheads $                      5.24 $                        2.54
Total Cost per unit $                    16.04 $                        7.24
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