Question

Fogerty Company makes two products—titanium Hubs and Sprockets. Data regarding the two products follow:

	Direct Labor-Hours per Unit	Annual Production
Hubs	0.70	12,000	units
Sprockets	0.30	49,000	units

Additional information about the company follows:

Hubs require $30 in direct materials per unit, and Sprockets require $13.

The direct labor wage rate is $14 per hour.

Hubs require special equipment and are more complex to manufacture than Sprockets.

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)	$	32,760	130	104	234
Special processing (machine-hours)	$	92,500	3,700	0	3,700
General factory (organization-sustaining)	$	258,300	NA	NA	NA

Required:

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

Answer 1

Fogerty Company

Determination of the unit product cost of each product according to the ABC System:

Cost per unit -
	Hubs	Sprockets
Direct materials	$30	$13
Direct labor	$9.80	$4.20
Overhead cost	$17.05	$3.65
unit product cost	$56.85	$20.85

Direct labor rate per unit is as follows,

Hubs - $14 x 0.70 DLH = $9.80 per unit

Sprockets = $14 x 0.30 DLH = $4.20 per unit

Workings –

Determination of the overhead cost assigned to each product:

• Overhead rate per activity is determined as follows,

Cost Pool	Estimated overhead cost	activity measure		Activity rate
Machine setups	$32,760	234 setups	32,760/234 = $140	$140 per setup
Special processing	$92,500	3,700 machine hours	92,500/3,700 = $25	$25 per machine hour
General factory	$258,300	23,100 direct labor hours	258,300/23,100 = $11.18	$11.18 per DLH

Since the activity measure for general factory is not provided in the question, the normal approach is to assume Direct Labor Hours as activity measure. Hence, the activity measure for General Factory is derived as follows,

Direct labor hours (DLH) for Hubs = 0.70 hours x 12,000 units = 8,400 DLH

Direct labor hours (DLH) for Sprockets = 0.30 hours x 49,000 units = 14,700 DLH

Hence total DLHs (activity measure) = 8,400 + 14,700 = 23,100 hours

• Overhead assigned to each product

Hubs
Cost Pool	Activity measure	Activity rate	overhead assigned
Machine setups	130 setups	$140	$18,200
Special processing	3,700 machine hours	$25	$92,500
General Factory	8,400 DLH	$11.18	$93,927
Total overhead assigned			$204,627
number of units			12,000
overhead cost per unit			$17.05
Sprockets
Cost Pool	Activity measure	Activity rate	overhead assigned
Machine setups	104 setups	$140	$14,560
Special processing	0	$25	0
General Factory	14,700 DLH	$11.18	$164,373
Total overhead assigned			$178,933
number of units			49,000
overhead cost per unit			$3.65