# 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.)

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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