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 $10.80 per unit, while product B has been assigned $3.60 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 Driver Consumption
Machine setup $360,000 Setup hours 4,000
Materials handling 100,000 Pounds of materials 20,000
Electric power 40,000 Kilowatt-hours 40,000

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 20,000
Direct materials cost $42,000 $54,000
Direct labor cost $24,000 $40,000
Number of setup hours 400 200
Pounds of materials used 1,000 3,000
Kilowatt-hours 2,000 4,000

Required:
Use activity-based costing to determine a unit cost for each product.

Results are below.

Explanation:

First, we need to calculate the activities rates of allocation:

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Machine setup= 360,000/4,000= $90 per set up hour

Materials handling= 100,000/20,000= $5 per pound of material

Electric power= 40,000/40,000= $1 per kilowwat hour

Now, we can allocate costs to each product:

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

A:

Allocated MOH= 90*400 + 5*1,000 + 1*2,000

Allocated MOH= $43,000

B:

Allocated MOH= 90*200 + 5*3,000 + 1*4,000

Allocated MOH= $37,000

Finally, the total and unitary cost:

A:

Total cost= 42,000 + 24,000 + 43,000

Total cost= $109,000

Unitary cost= 109,000/4,000

Unitary cost= $2.73

B:

Total cost= 54,000 + 40,000 + 37,000

Total cost= $131,000

Unitary cost= 131,000/20,000

Unitary cost= $6.55

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