Question

Exercise 7-13 (Static) Computing ABC Product Costs [LO7-3, LO7-4]

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

		(a)	(b)	(a) ÷ (b)
1	Activity Cost Pool (Activity Measure)	Estimated Overhead Cost	Activity	Activity Rate
	Machine setups (number of setups)	$72,000	400	$180.00	per setups
	Special processing (machine-hours)	$200,000	5,000	$40.00	per MH
	General factory (Direct Labor Hours)	$816,000	24,000	$34.00	per DLH
2		Hubs	Sprockets
	Direct material	$320,000	$720,000
	Direct labor	$120,000	$240,000
	Overhead
	Machine setups (number of setups)	$18,000	$54,000
	Special processing (machine-hours)	$200,000	$0
	General factory (Direct Labor Hours)	$272,000	$544,000
	Total costs	$930,000	$1,558,000
	No of units produced	10,000	40,000
	Unit product cost	$93.00	$38.95