IES 342 2/2004
Chapter 5 Activity-Based Costing and Management
Practice Problem Partial Solution
5-25 Activity-Based Costing Hakara Company (pg 168)
Cost Pools
Machine setup
Materials handling
Electric power
Activity Costs
$360,000
$100,000
$40,000
Direct materials
Direct labor
Factory overhead:
Machine setup $120 x 200 =
Materials handling $4 x 1,000=
Electric power $1 x 2,000 =
Total product costs
Production units
COST PER UNIT
Cost Drivers
3,000 setup hours
25,000 pounds
40,000 kilowatt hours
Overhead Rate
$120
$4
$1
A
$40,000
24,000
24,000
4,000
2,000
$94,000
 4,000
$23.50
B
$50,000
40,000
$120 x 240 =
$4 x 3,000 =
$1 x 4,000 =
28,800
12,000
4,000
$134,800
 20,000
$6.74
5-27 Product Selection (pg 169)
Before deciding on which of the two products the firm should focus, the company
should review its costing system. It is likely that Johans’ product costing system is
providing misleading cost information. The company is probably using a volumebased product costing system, which tends to overcost the high-volume product
(Desktop Computer) and undercost the low-volume product (Tablet Computer).
When competitors can sell a product at a price ($380) much lower than our cost
($660), it is likely that Johan’s costing system fails to determine product costs
properly or that applied manufacturing process is very inefficient.
The company should install an activity-based product costing system. If the
reported product cost indicates that the price of the high-volume desktops is too
high compared to the competitor’s price, then the company should adjust the price
accordingly.
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