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	25,000	units
Sprockets	0.40	44,000	units

Additional information about the company follows:

1. Hubs require $33 in direct materials per unit, and Sprockets require $13.

2. The direct labor wage rate is $18 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)	$	37,800	150	120	270
Special processing (machine-hours)	$	216,000	3,600	0	3,600
General factory (organization-sustaining)	$	301,600	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.

Compute the activity rate for each activity cost pool.

	Activity Cost Pool Activity Rate Machine setups per setup Special processing per MH

2.

Hubs Sprockets Direct materials Direct labor Overhead Unit cost $0.00 $0.00

Answer 1

Computation of ABC rate
Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
Machine Setups	$                            37,800	270	$                          140.00	per setups
Special Processing	$                         2,16,000	3,600	$                            60.00	per machine hrs
Total Cost	$                         2,53,800
	Activity Hubs	Sprockets
	Activity Based usage	Activity Based usage*ABC rate	Activity Based usage	Activity Based usage*ABC rate
Machine Setups	150	$                                    21,000	120	$                                    16,800
Special Processing	3600	$                                 2,16,000	0	$                                            -
Total Overhead Cost allocated		$                                 2,37,000		$                                    16,800
Calculation of Unit Products Costs
	Activity Hubs	Sprockets
Direct Materials	$                         8,25,000	$                                 5,72,000
Direct Labor	$                         3,60,000	$                                 3,16,800
Overhead Costs	$                         2,37,000	$                                    16,800
Total Product Costs	$                       14,22,000	$                                 9,05,600
Units Produced	25000	44000
Unit Product Costs(Rouding off to 2 decimal)	$                              56.88	$                                      20.58
Note:General Factory Overhead is not considered in calculating Unit Product Costs