Chapter 2.A, Problem 2E

EXERCISE 2A-2 Activity-Based Absorption Costing as an Alternative to Traditional Product Costing LO2-5

Harrison Company makes two products and uses a traditional costing system in which a single plantwide predetermined overhead rate is computed based on direct labor-hours. Data for the two products for the upcoming year follow:

These products are customized to some degree for specific customers.

Required:

1. The company's manufacturing overhead costs for the year are expected to be $576,000. Using the company's traditional costing system, compute the unit product costs for the two products.
2. Management is considering an activity-based absorption costing system in which half of the overhead would continue to be allocated based on direct labor-hours and half would be allocated based on engineering design time. This time is expected to be distributed as follows during the upcoming year.
Engineering design time (in hours)
Rascon-3,000 Parcel-3,000 Total-6000

Compute the unit product costs for the two products using the proposed activity-based absorption costing system.

Explain why the product costs differ between the two systems.