Hakara Company has been using direct labor costs as the basis for assigning overhead to its many products. Under this allocation system product A has been assigned overhead of $10.80 per unit while product B has been assigned $3.60 per unit. Management feels that an ABC system will provide a more accurate allocation of the overhead costs and has collected the following cost pool and cost driver information:

The following cost information pertains to the production of A and B, just two of its many products:

Required
1. Use activity-based costing to determine a unit cost for each product.
2. Comment on management's belief that the ABC system will generate an overhead allocation that is more accurate than the volume-based system currently in use.

Cost Pools Machine setup Materials handling Electric power Activity Costs $360,000 100,000 40,000 Cost Drivers Setup hours Pounds of materials Kilowatt-hours Driver Consumption 4,000 20,000 40,000 Number of units produced Direct materials cost Direct labor cost Number of setup hours Pounds of materials used Kilowatt-hours 4,000 $42,000 S24,000 400 1,000 2,000 20,000 $54,000 $40,000 200 3,000 4,000