Activity-Based Costing?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 Hakara's many products:

A

B

Number of units produced

4,000

20,000

Direct materials cost

$42,000

$54,000

Direct labor cost

$24,000

$40,000

Number of setup hours

400

200

Pounds of materials used

1,000

3,000

Kilowatt-hours

2,000

4,000

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 Cost Drivers $360,000 100,000 40,000 Setup hours Pounds of materials Kilowatt-hours Activity Driver Consumption 4,000 20,000 40,000