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	12,000	units
Sprockets	0.40	48,000	units

Additional information about the company follows:

1. Hubs require $35 in direct materials per unit, and Sprockets require $17.

2. The direct labor wage rate is $13 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)	$	20,250	125	100	225
Special processing (machine-hours)	$	148,000	3,700	0	3,700
General factory (organization-sustaining)	$	259,200	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

Requirement 1

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost	Expected Activity (B)	Activity rate (A/B)
Machine setups	Number of Setups	$         20,250.00	225	$          90.00	Per Setups
Special processing	Number of Machine hours	$      1,48,000.00	3700	$          40.00	Per Machine hours

Requirement 2

Calculation of total cost
	HUBS	Sprockets
Direct material	$         35.00	$     17.00
Direct labor	$         10.40	$        5.20
Overheads	$         13.27	$        0.19
Total Cost	$         58.67	$     22.39

Labor cost per unit = Cost per hour x Hours required per unit

Working

Cost assigned to Hubs
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setups	$           90.00	125	$                11,250
Special processing	$           40.00	3700	$      1,48,000.00
Total Overheads assigned			$      1,59,250.00
Production			12000
Overhead cost per unit			$ 13.27

Cost assigned to Sockets
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setups	$           90.00	100	$            9,000.00
Special processing	$           40.00	0	$                         -
Total Overheads assigned			$            9,000.00
Production			$          48,000.00
Overhead cost per unit			$ 0.19