Hayden, Inc. produces two different products, Product A and Product B. Hayden uses a traditional volume-based costing system in which direct labor hours are the allocation base. Hayden is considering switching to an ABC system by splitting its manufacturing overhead cost across three activities: Engineering, Manufacturing, and Inspection. The cost of each activity and usage of the activity drivers are as follows:
| |
Cost |
Usage by Product A |
Usage by Product B |
| Engineering (Machine Hours) |
$6,00,000 |
2,000 |
8,000 |
| Manufacturing (Direct Labor hours) |
$8,00,000 |
4,00,000 |
4,00,000 |
| Inspection (Batches) |
$2,00,000 |
4,000 |
1,000 |
| Total overhead |
$16,00,000 |
|
|
| |
|
|
|
| Units Manufactured |
|
10,000 |
5,000 |
Required:
a. Calculate the predetermined overhead rate under the traditional costing system.
b. Calculate the activity rate for Engineering.
c. Calculate the activity rate for Manufacturing.
d. Calculate the activity rate for Inspection.
e. Calculate the indirect manufacturing costs assigned to each unit of Product A under the traditional costing system.
f. Calculate the indirect manufacturing costs assigned to each unit of Product B under the traditional costing system.
g. Calculate the indirect manufacturing costs assigned to each unit of Product A under the ABC system.
h. Calculate the indirect manufacturing costs assigned to each unit of Product B under the ABC system.
i. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?