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	25,000 units
Sprockets	0.20	55,000 units

Additional information about the company follows:

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

b. The direct labor wage rate is $13 per hour.

c. Hubs are more complex to manufacture than Sprockets and they require special processing.

d. The company’s activity-based absorption costing system has the following activity cost pools:

  

	Estimated		Expected Activity
Activity Cost Pool (and Activity Measure)	Overhead Cost		Hubs	Sprockets	Total
Machine setups (number of setups)	$	31,320	145	116	261
Special processing (machine-hours)	$	245,000	4,900	0	4,900
General factory (Direct labor-hours)	$	520,000	15,000	11,000	26,000

Required:

1. Compute the activity rate for each activity cost pool.

2. Compute the unit product cost for Hubs and Sprockets using activity-based absorption costing.

Answer 1

Answers

• Requirement 1

Activity Cost Pool	Overhead cost	Total Activity	Activity Rate
	[A]	[B]	[C = A/B]
Machine setups	$31,320	261	$120.000	per setup
Special processing	$245,000	4900	$50.000	per MH
General Factory	$520,000	26000	$20.000	per DLHs

• Requirement 2

	Hubs		Sprockets
	Answer	Working	Answer	Working
Direct materials	$                                     30.00	[given]	$                        17.00	[given]
Direct labor	$                                       7.80	0.60 DLHs x $ 13	$                         2.60	0.20 DLHs x $ 13
Overhead	$                                     22.50	[ (145 x $120)+(4900 x $ 50) + (15000 x $ 20)]/25000 units	$                         4.25	[ (116 x $120)+(0 x $ 50) + (11000 x $ 20)]/55000 units
Unit cost	$                                     60.30 ANSWER		$                        23.85 ANSWER