Step by step answer with formulas Harrison company makes two products. managemen

Question

Step by step answer with formulas

Harrison company makes two products. management expects the manufacturing overhead costs for the year to be 144,00. The company is considering whether to use an activity based costing system or the traditional product costing system. The traditional cost system allocates the overhead on the basis of direct labor hours. under the activity based system, the overhead is allocated on the basis of engineering design time.

                                                   Rascon      Parcel

Direct materials cost per unit       13.00      22.00

direct labor cost per unit                6.00        3.00

direct labor hours per unit                .40         .20

number of units produced          20,000     80,000

engineering design time (hrs)    3,000        3,000

1. What is the unit product cost for Rascon using the proposed ABC system?

2. What is the unit product cost for Rascon using the traditional product costing system

Explanation / Answer

(a)ABC Approach

Overhead cost. = 14400

Half is allocated on the basis of direct labor hours, and half is allocated on the basis of design time (3000).
0.40 x 20,000 = 8000 Rascon direct labor hours

0.20 x 80,000 =16000 Parcel direct labor hours

7200 / (8000 + 16000) = $0.3 Overhead allocated per direct labor hour.
0.40 x 0.3 = $0.12 per unit Rascon
0.20 x 0.3 = $0.06 per unit Parcel

7200 / 6000 total design time = $1.2 per hour design time
3000 design hours / 8000 units produced = 0.375 hours design time for each unit of Rascon
1.2 x 0.375 = $0.45 per unit for Rascon

3000 design hours / 16000 units produced = 0.1875 hours design time for each unit of Parcel
1.2 x 0.1875 = $0.225 per unit for Parcel

Totals: Unit production cost
Rascon
13 + 6 +0.12+0.45 = $19.75 per unit
Parcel
22 + 3 + 0.06 + 0.225 = $25.285 per unit

*Note: Depending on how you want to round the amounts for the intermediate steps and the final answers, you could come up with slightly different amounts. But, essentially this is the way to solve it.

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