Hazelnut Corp. manufactures lawn ornaments. It currently has two product lines,
ID: 2563358 • Letter: H
Question
Hazelnut Corp. manufactures lawn ornaments. It currently has two product lines, the basic and the luxury. Hazelnut has a total of $141,142 in overhead.
The company has identified the following information about its overhead activity cost pools and the two product lines:
Required:
1. Suppose Hazelnut used a traditional costing system with machine hours as the cost driver. Determine the amount of overhead assigned to each product line. (Do not round intermediate calculations and round your final answers to the nearest whole dollar amount.)
2. Calculate the activity rates for each cost pool in Hazelnut’s ABC system.
3. Calculate the amount of overhead that Hazelnut will assign to the basic line if it uses an ABC system.
4. Determine the amount of overhead Hazelnut will assign to the luxury line if it uses an ABC system.
5. Compare the results for a traditional system with that of an ABC system. Which do you think is more accurate?
to Pool Quantity/Amount Consumed by
Basic Quantity/Amount Consumed by
Luxury Materials handling Number of moves $ 3,552 26 moves 48 moves Quality control Number of inspections $ 27,590 190 inspections 120 inspections Machine maintenance Number of machine hours $ 110,000 5,000 machine hours 5,000 machine hours
Explanation / Answer
Solution:
1) the amount of overhead assigned to each product line
First of all we need to identify the Overhead Rate per Machine Hours since the machine hour is a cost driver.
Overhead Rate = Estimated Overhead / Total Estimated Machine hours
= $141,142 / (5,000 + 5,000)MHs
= 141,142 / 10,000 MHs
= $14.1142 per machine hour
Overhead Assigned to Base line = Machine Hours used in base line x Overhead Rate = 5,000 MHs x $14.1142 = $70,571
Overhead Assigned to Luxury line = Machine Hours used in base line x Overhead Rate = 5,000 MHs x $14.1142 = $70,571
2) the activity rates for each cost pool in Hazelnut’s ABC system
Activity Cost Pools
Cost Driver
Cost Assigned to Pool (a)
Quantity/Amount Consumed by Basic
Quantity/Amount Consumed by Luxury
Total Quantity/Amount Consumed (b)
Activity Rate for each cost pool (a/b)
Materials handling
Number of moves
3,552
26 moves
48 moves
74 moves
$48.00
per move
Quality control
Number of inspections
27,590
190 inspections
120 inspections
310 Inspections
$89.00
per inspection
Machine maintenance
Number of machine hours
110,000
5,000 machine hours
5,000 machine hours
10,000 MHs
$11.00
per machine hour
3) the amount of overhead that Hazelnut will assign to the basic line if it uses an ABC system.
Basic Product Line
Activities
Rate per Cost driver Unit
Activity Consumed
Allocated Indirect Cost
(a)
(b)
(a*b)
Materials handling
$48
26
$1,248
Quality control
$89
190
$16,910
Machine maintenance
$11
5000
$55,000
Assigned Overhead Cost
$73,158
4) the amount of overhead Hazelnut will assign to the luxury line if it uses an ABC system.
Luxury Product Line
Activities
Rate per Cost driver Unit
Activity Consumed
Allocated Indirect Cost
(a)
(s)
(a*s)
Materials handling
$48
48
$2,304
Quality control
$89
120
$10,680
Machine maintenance
$11
5000
$55,000
Total Assigned Overhead
$67,984
5) ABC System is more accurate.
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Activity Cost Pools
Cost Driver
Cost Assigned to Pool (a)
Quantity/Amount Consumed by Basic
Quantity/Amount Consumed by Luxury
Total Quantity/Amount Consumed (b)
Activity Rate for each cost pool (a/b)
Materials handling
Number of moves
3,552
26 moves
48 moves
74 moves
$48.00
per move
Quality control
Number of inspections
27,590
190 inspections
120 inspections
310 Inspections
$89.00
per inspection
Machine maintenance
Number of machine hours
110,000
5,000 machine hours
5,000 machine hours
10,000 MHs
$11.00
per machine hour
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