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Harwell, Inc. uses a traditional volume-based costing system in which direct labor hours are the allocation base. Harwell produces two different products: Product A, which
Harwell, Inc. uses a traditional volume-based costing system in which direct labor hours are the allocation base. Harwell produces two different products: Product A, which uses 82,000 direct labor hours, and Product B, which uses 24,000 direct labor hours. Harwell is considering switching to an ABC system by splitting its manufacturing overhead cost of $850,000 across three activities: Setup, Production, and Finishing. Under the traditional volume-based costing system, the predetermined overhead rate is $8.50/direct labor hour. Under the ABC system, the cost of each activity and proportion of the activity drivers used by each product are as follows: 8 01:39:34 Proportion used by Product A 30% 40% 20% Total Cost $ 68,000 $ 339,000 $ 86,000 Design (Engineering Hours) Production (Direct Labor Hours) Inspection (Batches) Proportion used by Product B 70% 609 80% Required: a. Calculate the indirect manufacturing costs assigned to Product A under the traditional costing system. Indirect Manufacturing Costs b. Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system. Indirect Manufacturing Costs c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system. Indirect Manufacturing Costs d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system. Indirect Manufacturing Costs e. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC? Product A Product B
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