Question

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

	Direct Labor-Hours per Unit	Annual Production
Hubs	0.60	20,000	units
Sprockets	0.20	59,000	units

Additional information about the company follows:

1. Hubs require $32 in direct materials per unit, and Sprockets require $15.

2. The direct labor wage rate is $14 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)	$	15,390	95	76	171
Special processing (machine-hours)	$	141,000	4,700	0	4,700
General factory (organization-sustaining)	$	189,000	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

Ans. 1	*Activity rate =   Estimated overhead / Total expected activity
	Activity cost pool	Estimated overhead (a)	Total expected activity (b)	Activity rates (a/b)
	Machine setups	$15,390	171	setups	$90.00	per setup
	Special processing	$141,000	4700	machine hours	$30.00	Per machine hour
	General factory	$189,000	-	Direct labor hours	-	Per direct labor hour
	*General factory has no expected activity so this cost would not be allocated to any product.
Ans. 2		Hubs	Sprockets
	Direct materials	$32.00	$15.00
	Direct labor cost	$8.40	$2.80
	Overhead	$7.48	$0.12
	Unit product cost	$47.88	$17.92
	*Direct materilas per unit is already given.
	*Calculations of Direct labor cost per unit:
	*Direct labor cost per unit = Direct labor hours per unit * Direct labor wages rate
	Hubs	0.60 * $14	$8.40	per unit
	Sprockets	0.20 * $14	$2.80	per unit
	*Calculations for Overhead cost per unit:
		HUBS	SPROCKETS
	Activity cost pool	Expected activity	Activity rate	Cost	Expected activity	Activity rate	Cost
		per product (a)	(b)	Assigned (a*b)	per product (a)	(b)	Assigned (a*b)
	Machine setups	95	$90	$8,550	76	$90	$6,840
	Special processing	4700	$30	$141,000	0	$30	$0
	Total Manufacturing Overhead			$149,550			$6,840
	*Overhead cost per unit = Total manufacturing overhead / Annual production
	Hubs	$149,550 / 20,000	$7.48	per unit
	Sprockets	$6,840 / 59,000	$0.12	per unit