Question

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

	Direct Labor-Hours per Unit	Annual Production
Hubs	0.50	13,000	units
Sprockets	0.10	41,000	units

Additional information about the company follows:

1. Hubs require $23 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)	$	25,740	110	88	198
Special processing (machine-hours)	$	107,500	4,300	0	4,300
General factory (organization-sustaining)	$	84,400	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

Answer:

(a)- Activity for each cost pool.

Activity Cost Pool	Activity Rate Machine (a) ÷ (b)
Machine setups [$25740/ 198 setups]	$130 per setup
Special processing [$107500/ 4300 MH]	$25 per MH

(b)- Unit cost of each product according to the ABC system

	Hubs	Sprockets
Direct Material	$23	$13
Direct Labor	$9.5	$1.9
Overhead	$9.37	$0.28
Unit Cost	$41.87	$15.18

Calculation of Unit Product Cost

Hubs

Activity Cost Pool	(a)Activity Rate	(b)Activity	(a) × (b)ABC Cost
Machine setups	130 per setup	110	$14300
Special processing	25per MH	4300	$107500
General factory	0 per DLH	0	0
Total			$ 121800

Sprockets:

Activity Cost Pool	(a)Activity Rate	(b)Activity	(a) × (b)ABC Cos
Machine setups	130 per setup	88	$11440
Special processing	25 per MH	0	0
General factory	0 per DLH	0	0
Total			$11440

Unit Product Cost

	Hubs	Sprockets
Direct materials	$23	$13
Direct labor:
$19per DLH × 0.50 DLHs per unit	$9.5
$19 per DLH × 0.10DLHs per unit		$1.9
Overhead:
$121800/ 13,000 Units	$9.37
$11440/ 41,000 Units		$0.28
Unit cost	$41.87	$15.18