Harwell, Inc. produces two different products, Product A and Product B. Harwell uses a traditional volume-based costing system in which direct labor hours are the allocation base. Harwell is considering switching to an ABC system by splitting its manufacturing overhead cost of $400,000 across three activities: Setup, Production, and Finishing. Under the traditional volume-based costing system, the predetermined overhead rate is $4.00/direct labor hour. Under the ABC system, the rate for each activity and usage of the activity drivers are as follows: Activity RateUsage by Product AUsage by Product BSetup (Batches)$100/hour 150 350 Production (Direct Labor Hours)$3.00 40,000 60,000 Finishing (Machine Hours)$500 20 80 Required:a. Calculate the indirect manufacturing

Question

costs assigned to Product A under the traditional costing system.b. Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system.c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.e. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?

What will be an ideal response?

Answer 1

a. $160,000 = $4.00 × 40,000
b. $240,000 = $4.00 × 60,000
c. $145,000 = ($100 × 150) + ($3.00 × 40,000) + ($500 × 20)
d. $255,000 = ($100 × 350) + ($3.00 × 60,000) + ($500 × 80)
e. Product B is under-costed and Product A is over-costed.


Predetermined overhead rate × Direct labor hours = Indirect costs assigned to each product under traditional system. Activity rate × Activity driver usage = Activity cost. Sum of activity costs = Indirect costs assigned to each product under ABC. If the cost under the traditional system is higher than under ABC, it is overcosted. If lower, it is undercosted.