Question

Kunkel Company makes two products and uses a conventional costing system in which a single plantwide predetermined overhead rate is computed based on direct labor-hours. Data for the two products for the upcoming year follow: Mercon Wurcon Direct materials cost per unit $ 11.00 $ 9.00 Direct labor cost per unit $ 3.00 $ 4.00 Direct labor-hours per unit 1.00 7.50 Number of units produced 2,000 4,000 These products are customized to some degree for specific customers.

1. The company's manufacturing overhead costs for the year are expected to be $1,280,000. Using the company's conventional costing system, compute the unit product costs for the two products.

2. Management is considering an activity-based costing system in which half of the overhead would continue to be allocated on the basis of direct labor-hours and half would be allocated on the basis of engineering design time.

This time is expected to be distributed as follows during the upcoming year: Mercon Wurcon Total Engineering design time (in hours) 4,000 4,000 8,000 Compute the unit product costs for the two products using the proposed ABC system. (For all requirements, do not round intermediate calculations. Round your final answers to 2 decimal places.)

Answer 1

Overhead Rate = Total Overheads/Total Labor hours
	Mercon	Wurcon	Total
Direct Material cost per unit	11	9
Direct Labor cost per unit	3	4
Direct labor hours per unit	1	7.5
Number of units	2000	4000
Total labor hours	2000	30000	32000
Hence, overhead rate	40	per Direct labor hour
Calculation of Unit Product Cost under conventional system
	Mercon	Wurcon
Direct Material cost per unit	11	9
Direct Labor cost per unit	3	4
Overhead cost per unit	40	300
Unit cost	54	313
ABC System
Rate
Labor hours	20	per Direct Labor hour
Enginnering Time	80	per Engineering design hour
Calculation of Unit Product Cost under ABC system
	Mercon	Wurcon
Direct Material cost per unit	11	9
Direct Labor cost per unit	3	4
Overhead cost per unit
Labor hours	20	150
Engineering Hours	160	80
Unit Cost	194	243