Question

Data regarding the two products follow:

	Direct Labor-Hours Per Unit	Annual Production
Hubs	0.70	10,000 Units
Sprockets	0.50	40,000 Units

Additional information about the company follows:

1. Hubs require $28 in direct materials per unit, and Sprockets require $16.
2. The direct labor wage rate is $20 per hour.
3. Hubs are more complex to manufacture than Sprockets and they require special equipment.
4. The ABC System has the following activity cost pools:

Activity Cost Pool (Activity Measure)	Estimated Overhead Cost	Activity        Hubs              Sprockets                Total
Machine setups (number of setups)	$68,000	100	300	400
Special processing (machine-hours)	$250,000	5,000	0	5,000
General factory (organization-sustaining)	$816,000	NA	NA	NA

Required:

1. Compute the activity rate for each cost pool. Did you compute an activity rate for all of the activity cost pools? Why?
2. Determine the unit product cost of each product according to the ABC system.

Answer 1

Activity rate
Activity		Estimated	Total Cost	Activity
		Overheads	driivers	rate
Machine Setups	68,000	400	170	per setup
Special Processing	2,50,000	5000	50	per Mh
The activity rate of General factory cost has not been computed.
This is due to the fact that it is related to sustainability of the business and hence,
will not be apportioned among the products.
Activity cost allocated
Activity		Rate	Hubs	Sprocket
			Cost driver	OH cost	Cost driver	OH cost
Machine setup	170	100	17000	300	51000
Special Processing	50	5000	250000	0	0
	Total Overheads cost	267000		51000
	Divide: Units		10000		40000
	OH cost per unit		26.7		1.275
Unit product cost
			Hubs	Sprocket
Direct material cost		28	16
Direct labor cost @ 20 per hour	14	10
OH cost per unit		26.7	1.275
Unit product cost		68.7	27.275