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	28,000	units
Sprockets	0.40	52,000	units

Additional information about the company follows:

1. Hubs require $30 in direct materials per unit, and Sprockets require $17.

2. The direct labor wage rate is $16 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)	$	16,560	80	64	144
Special processing (machine-hours)	$	180,000	4,000	0	4,000
General factory (organization-sustaining)	$	376,000	NA	NA	NA

Required:

2. Determine the unit product cost of each product according to the ABC system.

Answer 1

Solution

	Cost per Unit
Hubs	$                  49.56
Sprockets	$                  23.54

Working

ABC Costing
	Hubs	Sprockets
Direct material	$                  30.00	$                     17.00
Direct labor	$                  12.80	$                        6.40
Overhead allocated	$                    6.76	$                        0.14
Unit product cost	$                  49.56	$                     23.54

.

.

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Machien setup	Number of setup	$ 16,560	144	$          115.00	Per setup
Special processing	Number of machine hour	$ 180,000	4000	$             45.00	Per machine hour

.

Cost assigned to Hubs
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machien setup	$                               115.00	80.00	$ 9,200.00
Special processing	$                                 45.00	4,000.00	$ 180000.00
Total Overheads assigned	$ 189200.00
Production	28,000.00
Overhead cost per unit	$ 6.76

.

Cost assigned to Sprockets
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machien setup	$ 115	64	$ 7,360
Special processing	$ 45	0	$ 0
Total Overheads assigned	$               7,360.00
Production	52,000.00
Overhead cost per unit	$                 0.14