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Part II: Determine total Product Cost using a single driver versus Activity Based Costing

HC uses a plantwide manufacturing overhead rate based on machine hours to allocate

manufacturing overhead to its products. Lizzie estimates that it will incur $$970,000$ in total

manufacturing overhead costs in the upcoming year and will use $10,000$ machine hours.

Hazardous waste disposal fees have been included in total manufacturing overhead and

allocated to all products using the plant$-$wide overhead rate. However, waste$-$disposal fees

have started to increase and have reduced the profit margins on all products. Lizzie wants to

implement an activity$-$based costing system so that managers know the waste disposal costs of

each product.

Expected usage and costs for manufacturing overhead activities for the upcoming year are as

follows:

Description of Cost Pool

Estimated

Cost Cost Driver

Estimated

Activity for

This Year

Machine maintenance

costs....................

$ $400,000$ Number of machine

hours

$10,000$

Engineering change

orders......................

$ $150,000$ Number of change

orders

$3,000$

Hazardous waste

disposal........................

$ $420,000$ Pounds of hazardous

materials generated

$1,500$

Total overhead

costs................................

$$970,000$

During the year, Job $356$ for Phoenix is started and completed. Usage for this job follows:

$290$ pounds of direct materials at $$35$ per pound

$20$ direct labor hours used at $$20$ per labor hour

$60$ machine hours used

$9$ change orders

$60$ pounds of hazardous waste generated

$1.$ Calculate the cost of Job $356$ using the traditional plantwide manufacturing overhead

rate based on machine hours.

$2.$ Calculate the cost of Job $356$ using activity$-$based costing.

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