Question

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

	Direct Labor-Hours per Unit	Annual Production
Hubs	0.90	28,000	units
Sprockets	0.50	57,000	units

Additional information about the company follows:

1. Hubs require $39 in direct materials per unit, and Sprockets require $15.

2. The direct labor wage rate is $15 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)	$	26,910	130	104	234
Special processing (machine-hours)	$	189,000	4,200	0	4,200
General factory (organization-sustaining)	$	367,200	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:

Activity Rate

Activity	Cost Pool	/	Cost Driver	=	Activity Rate
Machine Setups	$26,910	/	234 machine setups	=	$115 per machine setup
Special processing	$189,000	/	4,200 machine hours	=	$45 per machine hour

Requirement 2:

Allocation of overhead cost

Hubs

Activity	Cost Driver	x	Activity Rate	=	Overhead cost
Machine Setups	130 setups	x	$115 per setup	=	$14,950
Special Processing	4,200 machine hours	x	$45 per machine hour	=	$189,000
Overhead cost				=	$203,950

Overhead cost per unit = $203,950 / 28,000 units = $7.28 per unit

Sprockets

Activity	Cost Driver	x	Activity Rate	=	Overhead cost
Machine Setups	104 setups	x	$115 per setup	=	$11,960
Special Processing	0 machine hours	x	$45 per machine hour	=	$0
Overhead cost				=	$11,960

Overhead cost per unit = $11,960 / 57,000 units = $0.21 per unit

Unit Product Cost

Particulars	Hub	Sprockets
Direct Materials per unit	$39.00	$15.00
Direct Labor per unit (0.90 * $15) (0.50 * $15)	$13.50	$7.50
Overhead cost per unit	$7.28	$0.21
Unit Product Cost	$59.78	$22.71

All the best...