Question

Exercise 7-13 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	0.60	19,000	units
Sprockets	0.20	52,000	units

Additional information about the company follows:

1. Hubs require $28 in direct materials per unit, and Sprockets require $12.

2. The direct labor wage rate is $19 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)	$	19,125	85	68	153
Special processing (machine-hours)	$	168,000	4,800	0	4,800
General factory (organization-sustaining)	$	136,200	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

Solution

Requirement 1

Activity Cost Pool	Activity rate (A/B)
Machine setup	$          125.00	Per Setup
Special processing	$             35.00	Per machine hour

Working

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Machine setup	Number of Setup	$        19,125.00	153	$          125.00	Per Setup
Specil processing	Number of machine hour	$      168,000.00	4800	$             35.00	Per machine hour

Requirement 2

	Hubs	Sprockets
Direct material	$                    28.00	$                     12.00
Direct labor	$                    11.40	$                        3.80
Overheads	$                      9.40	$                        0.16
Total Cost per unit	$                    48.80	$                     15.96

Working

Cost assigned to Hubs
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$                   125.00	85	$         10,625.00
Special processing	$                     35.00	4800	$       168,000.00
Total Overheads assigned			$       178,625.00
Production			19,000.00
Overhead cost per unit			$ 9.40

.

Cost assigned to Sprockets
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$                   125.00	68	$           8,500.00
Special processing	$                     35.00	0	$                    -
Total Overheads assigned			$           8,500.00
Production			52,000.00
Overhead cost per unit			$                 0.16