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	16,000	units
Sprockets	0.40	41,000	units

Additional information about the company follows:

Hubs require $21 in direct materials per unit, and Sprockets require $15.

The direct labor wage rate is $15 per hour.

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

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)	$	16,065	85	68	153
Special processing (machine-hours)	$	144,000	4,800	0	4,800
General factory (organization-sustaining)	$	258,800	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

Fogerty Company

Determination of the unit product cost of each product according to the ABC System:

Cost per unit -
	Hubs	Sprockets
Direct materials	$21	$15
Direct labor	$12	$6
Overhead cost	$9.56	$0.17
unit product cost	$42.56	$21.17

Direct labor rate per unit is as follows,

Hubs - $15 x 0.80 DLH = $12 per unit

Sprockets = $15 x 0.40 DLH = $6 per unit

Workings –

Determination of the overhead cost assigned to each product:

• Overhead rate per activity is determined as follows,

Cost Pool	Estimated overhead cost	activity measure		Activity rate
Machine setups	$16,065	153 setups	16,065/153 = $105	$105 per setup
Special processing	$144,000	4,800 machine hours	144,000/4,800 = $30	$30 per machine hour

Since the activity measure for general factory is not provided in the question, no overhead is allocated to the two products, Hubs and Sprockets.

Explanation: Under ABC method, costs are assigned to products based on the activity base, activity usage and activity rates. For, general factory, the information about activity base and usage are not provided in the question, hence this cost is not assigned to the two products.

Overhead assigned to each product

Hubs
Cost Pool	Activity measure	Activity rate	overhead assigned
Machine setups	85 Setups	$105	$8,925
Special processing	4,800 machine hours	$30	$144,000
Total overhead assigned			$152,925
number of units			16,000
overhead cost per unit			$9.56
Sprockets
Cost Pool	Activity measure	Activity rate	overhead assigned
Machine setups	68 setups	$105	$7,140
Special processing	0	$25	0
Total overhead assigned			$7,140
number of units			41,000
overhead cost per unit			$0.17