Question

Fogerty Company makes two products—titanium Hubs and Sprockets. Data regarding the two products follow:

	Direct Labor-Hours per Unit	Annual Production
Hubs	0.80	13,000	units
Sprockets	0.40	54,000	units

Additional information about the company follows:

1. Hubs require $30 in direct materials per unit, and Sprockets require $13.

2. The direct labor wage rate is $19 per hour.

3. Hubs require special equipment and are more complex to manufacture than Sprockets.

4. The ABC system has the following activity cost pools:

	Estimated		Activity
Activity Cost Pool (Activity Measure)	Overhead Cost		Hubs	Sprockets	Total
Machine setups (number of setups)	$	25,200	140	112	252
Special processing (machine-hours)	$	276,000	4,600	0	4,600
General factory (organization-sustaining)	$	183,200	NA	NA	NA

Required:

1. Compute the activity rate for each activity cost pool.

2. Determine the unit product cost of each product according to the ABC system.

Answer 1

Solution

	Activity rate
Machine setup	$       100.00	Per setup
Special processing	$          60.00	Per machine hour

.

	Hubs	Sprockets
Total Cost per unit	$                  67.51	$                     20.81

Working

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Machine setup	Number of setup	$ 25,200	252	$          100.00	Per setup
Special processing	Number of machine hour	$ 276,000	4600	$             60.00	Per machine hour

.

Cost assigned to Hubs
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$        100.00	140.00	$ 14,000.00
Special processing	$           60.00	4,600.00	$ 276000.00
Total Overheads assigned			$       290,000.00
Production			13,000.00
Overhead cost per unit			$ 22.31

.

Cost assigned to Sprockets
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$        100.00	112	$ 11,200
Special processing	$           60.00	0	$ 0
Total Overheads assigned			$             11,200.00
Production			54,000.00
Overhead cost per unit			$                 0.21

.

ABC Costing
	Hubs	Sprockets
Direct material	$                  30.00	$                     13.00
Direct labor (Labor rate x Hours per unit)	$                  15.20	$                        7.60
Overheads	$                  22.31	$                        0.21
Total Cost per unit	$                  67.51	$                     20.81