Chapter 3A, Problem 3A.2E

Activity-Based Absorption Costing as an Alternative to Traditional Product Costing LO3-5

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:



3. Compute the unit product costs for the two products using the proposed activity-based absorption costing system.
4. Explain why the product costs differ between the two systems.