Question

Harris Systems specializes in servers for workgroup, e-commerce, and ERP applications. The company’s original job costing system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of \(22 per direct labor hour.

A task force headed by Harris’s CFO recently designed an ABC system with four activities. The ABC system retains the current system’s two direct cost categories. Overhead costs are reflected in the four activities. Pertinent data follow:

___________________________________________________________________

Activity Allocation Base Predetermined Overhead

Allocation Rate____

Materials handling Number of parts \) 0.85

Machine setup Number of setups 500.00

Assembling Number of assembling hours 80.00

Shipping Number of shipments 1,500.00_______

Harris Systems has been awarded two new contracts, which will be produced as Job A and Job B. Budget data relating to the contracts follow:

____________________________________________________________

Job A Job B__

Number of parts 15,000 2,000

Number of setups 6 4

Number of assembling hours 1,500 200

Number of shipments 1 1

Total direct labor hours 8,000 600

Number of units produced 100 10

Direct materials cost \( 220,000 \) 30,000

Direct labor cost \( 160,000 \) 12,000__

Requirements

2. Suppose Harris Systems adopts the ABC system. Compute the budgeted product cost per unit for each job using ABC.

Short answer

Budgeted Product Cost per unit

For Product A: $517.25

For Product B: $6,320

Step-by-step solution

Step-by-Step-SolutionStep 1: Budgeted product cost for Job A

$$\begin{gathered} \mathbf{Material}\mathbf{}\mathbf{Handling}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Pre}\mathbf{}\mathbf{determined}\mathbf{}\mathbf{Over}\mathbf{}\mathbf{head}\mathbf{}\mathbf{Allocation}\mathbf{}\mathbf{Rate}\mathbf{\times }\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Parts} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{85}\mathbf{\times }\mathbf{15}\mathbf{,}\mathbf{000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{750} \end{gathered}$$

$$\begin{gathered} \mathbf{Machine}\mathbf{}\mathbf{Setup}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Predetermined}\mathbf{}\mathbf{Overhead}\mathbf{}\mathbf{Allocation}\mathbf{}\mathbf{Rate}\mathbf{\times }\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Setups} \\ \begin{array}{c}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{500}\mathbf{\times }\mathbf{6}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\end{array} \end{gathered}$$

$$\begin{gathered} \mathbf{Assembling}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Predetermined}\mathbf{}\mathbf{Overhead}\mathbf{}\mathbf{Allocation}\mathbf{}\mathbf{Rate}\mathbf{\times }\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Assembling}\mathbf{}\mathbf{Hours} \\ \begin{array}{c}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{80}\mathbf{\times }\mathbf{1}\mathbf{,}\mathbf{500}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}\end{array} \end{gathered}$$

$$\begin{gathered} \mathbf{Shipping}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Predetermined}\mathbf{}\mathbf{Overhead}\mathbf{}\mathbf{Allocation}\mathbf{}\mathbf{Rate}\mathbf{\times }\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Shipments} \\ \begin{array}{c}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500}\mathbf{\times }\mathbf{1}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500}\end{array} \end{gathered}$$

$$\begin{gathered} \mathbf{Total}\mathbf{}\mathbf{Indirect}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Material}\mathbf{}\mathbf{handling}\mathbf{}\mathbf{Cost}\mathbf{+}\mathbf{Machine}\mathbf{}\mathbf{Setup}\mathbf{}\mathbf{Cost}\mathbf{+}\mathbf{Assembling}\mathbf{}\mathbf{Cost}\mathbf{+}\mathbf{Shipping}\mathbf{}\mathbf{Cost} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{750}\mathbf{+}\mathbf{\$}\mathbf{3}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{120}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{137}\mathbf{,}\mathbf{250} \end{gathered}$$

$$\begin{gathered} \mathbf{Total}\mathbf{}\mathbf{Budgeted}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Budgeted}\mathbf{}\mathbf{DirectMaterial}\mathbf{}\mathbf{Cost}\mathbf{+}\mathbf{Budgeted}\mathbf{}\mathbf{Direct}\mathbf{}\mathbf{Labor}\mathbf{}\mathbf{Cost}\mathbf{+}\mathbf{Budgeted}\mathbf{}\mathbf{Indirect}\mathbf{}\mathbf{Cost} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{220}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{160}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{137}\mathbf{,}\mathbf{250} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{517}\mathbf{,}\mathbf{250} \end{gathered}$$

$$\begin{gathered} \mathbf{Budgeted}\mathbf{}\mathbf{Product}\mathbf{}\mathbf{Cost}\mathbf{}\mathbf{per}\mathbf{}\mathbf{unit}\mathbf{=}\frac{\mathbf{Total}\mathbf{}\mathbf{Budgeted}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{units}\mathbf{}\mathbf{produced}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{517}\mathbf{,}\mathbf{250}}{\mathbf{100}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{517}\mathbf{.}\mathbf{25} \end{gathered}$$

Budgeted product cost for Job B

$$\begin{gathered} \mathbf{Material}\mathbf{}\mathbf{Handling}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Predetermined}\mathbf{}\mathbf{Overhead}\mathbf{}\mathbf{Allocation}\mathbf{}\mathbf{Rate}\mathbf{\times }\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Parts} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{85}\mathbf{\times }\mathbf{2}\mathbf{,}\mathbf{000} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{700} \end{gathered}$$

$\begin{array}{c}\mathbf{Machine}\mathbf{}\mathbf{Setup}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Predetermined}\mathbf{}\mathbf{Over}\mathbf{}\mathbf{head}\mathbf{}\mathbf{Allocation}\mathbf{}\mathbf{Rate}\mathbf{\times }\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Setups}\\ \mathbf{=}\mathbf{\$}\mathbf{500}\mathbf{\times }\mathbf{4}\\ \mathbf{=}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\end{array}$

$\begin{array}{c}\mathbf{Assembling}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Predetermined}\mathbf{}\mathbf{Overhead}\mathbf{}\mathbf{AllocationRate}\mathbf{\times }\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{AssemblingHours}\\ \mathbf{=}\mathbf{\$}\mathbf{80}\mathbf{\times }\mathbf{200}\\ \mathbf{=}\mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{000}\end{array}$

$\begin{array}{c}\mathbf{Shipping}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Predetermined}\mathbf{}\mathbf{Overhead}\mathbf{}\mathbf{Allocation}\mathbf{}\mathbf{Rate}\mathbf{\times }\mathbf{Number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{Shipments}\\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500}\mathbf{\times }\mathbf{1}\\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500}\end{array}$

$\begin{array}{c}\mathbf{Total}\mathbf{}\mathbf{Indirect}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Materialhandling}\mathbf{}\mathbf{Cost}\mathbf{+}\mathbf{Machine}\mathbf{}\mathbf{Setup}\mathbf{}\mathbf{Cost}\mathbf{+}\mathbf{Assembling}\mathbf{}\mathbf{Cost}\mathbf{+}\mathbf{Shipping}\mathbf{}\mathbf{Cost}\\ \mathbf{=}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{700}\mathbf{+}\mathbf{\$}\mathbf{2}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{500}\\ \mathbf{=}\mathbf{\$}\mathbf{21}\mathbf{,}\mathbf{200}\end{array}$

$\begin{array}{c}\mathbf{Total}\mathbf{}\mathbf{Budgeted}\mathbf{}\mathbf{Cost}\mathbf{=}\mathbf{Budgeted}\mathbf{}\mathbf{DirectMaterial}\mathbf{}\mathbf{Cost}\mathbf{+}\mathbf{Budgeted}\mathbf{}\mathbf{Direct}\mathbf{}\mathbf{Labor}\mathbf{}\mathbf{Cost}\mathbf{+}\mathbf{Budgeted}\mathbf{}\mathbf{Indirect}\mathbf{}\mathbf{Cost}\\ \mathbf{=}\mathbf{\$}\mathbf{30}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{21}\mathbf{,}\mathbf{200}\\ \mathbf{=}\mathbf{\$}\mathbf{63}\mathbf{,}\mathbf{200}\end{array}$

$\begin{array}{c}\mathbf{Budgeted}\mathbf{}\mathbf{Product}\mathbf{}\mathbf{Cost}\mathbf{}\mathbf{per}\mathbf{}\mathbf{unit}\mathbf{=}\frac{\mathbf{Total}\mathbf{}\mathbf{Budgeted}\mathbf{}\mathbf{Cost}}{\mathbf{Total}\mathbf{}\mathbf{number}\mathbf{}\mathbf{of}\mathbf{}\mathbf{units}\mathbf{}\mathbf{produced}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{63}\mathbf{,}\mathbf{200}}{\mathbf{10}}\\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{320}\end{array}$