Question

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

	Direct Labor-Hours per Unit	Annual Production
Hubs	0.60	16,000	units
Sprockets	0.20	45,000	units

Additional information about the company follows:

1. Hubs require $30 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)	$	27,000	150	120	270
Special processing (machine-hours)	$	80,000	4,000	0	4,000
General factory (organization-sustaining)	$	108,600	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	$          100.00	Per Setup
Special processing	$             20.00	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	$        27,000.00	270	$          100.00	Per Setup
Special processing	Number of machine hour	$        80,000.00	4000	$             20.00	Per machine hour

.Requirement 2

ABC Costing
	Hubs	Sprockets
Direct material	$                    30.00	$                     12.00
Direct labor	$                    11.40*	$                        3.80
Overheads	$                      5.94	$                        0.27
Total Cost per unit	$                    47.34	$                     16.07

*((16000 x .6) x $19)/16000

.Working

Cost assigned to Hubs
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$                   100.00	150	$         15,000.00
Special processing	$                     20.00	4000	$         80,000.00
Total Overheads assigned			$         95,000.00
Production			16,000.00
Overhead cost per unit			$ 5.94

.

Cost assigned to Sprockets
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$                   100.00	120	$         12,000.00
Special processing	$                     20.00	0	$                    -
Total Overheads assigned			$         12,000.00
Production			45,000.00
Overhead cost per unit			$                 0.27