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	10,000	units
Sprockets	0.40	40,000	units

Additional information about the company follows:

1. Hubs require $32 in direct materials per unit, and Sprockets require $18.

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)	$	72,000	100	300	400
Special processing (machine-hours)	$	200,000	5,000	0	5,000
General factory (organization-sustaining)	$	816,000	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	$72,000	400	setups	$180.00	per setup
	Special processing	$200,000	5000	machine hours	$40.00	Per machine hour
	General factory	$816,000	NA	Direct labor hours	NA	Per direct labor hour
	*There is no expected activities for both products of general factory cost is given.
	So this cost would not be assigned to any product.
Ans. 2		Hubs	Sprockets
	Direct materials	$32.00	$18.00
	Direct labor cost	$12.00	$6.00
	Overhead	$21.80	$1.23
	Unit product cost	$65.80	$25.23
	*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	0.80 * $15	$12.00
	Sprockets	0.40 * $15	$6.00
	*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	100	$180	$18,000	300	$180	$54,000
	Special processing	5000	$40	$200,000	0	$40	$0
	General factory	NA	NA	NA	NA	NA	NA
	Total Manufacturing Overhead			$218,000			$54,000
	*Overhead cost per unit = Total manufacturing overhead / Annual production
	Hubs	$218,000 / 10,000	$21.80
	Sprockets	$54,000 / 44,000	$1.23