Question

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

	Direct Labor-Hours per Unit	Annual Production
Hubs	0.50	28,000	units
Sprockets	0.10	47,000	units

Additional information about the company follows:

1. Hubs require $33 in direct materials per unit, and Sprockets require $12.

2. The direct labor wage rate is $11 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	125	100	225
Special processing (machine-hours)	$	166,500	3,700	0	3,700
General factory (organization-sustaining)	$	42,200	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

Requirement 1

Activity Cost Pool	Activity rate (A/B)
Machine setups	$          120.00	Per Setup
Special processing	$             45.00	Per machine hours

Working

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Machine setups	Number of Setup	$        27,000.00	225	$          120.00	Per Setup
Special processing	Number of machine hours	$      166,500.00	3700	$             45.00	Per machine hours

Requirement 2

	Hubs	Sprockets
Direct material	$                    33.00	$                     12.00
Direct labor	$                      5.50	$                        1.10
Overheads	$                      6.48	$                        0.26
Total Cost per unit	$                    44.98	$                     13.36

Working

Cost assigned to Hubs
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setups	$                   120.00	125.00	$         15,000.00
Special processing	$                     45.00	3,700.00	$       166,500.00
Total Overheads assigned			$       181,500.00
Production			28,000.00
Overhead cost per unit			$ 6.48

.

Cost assigned to Sprockets
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setups	$                   120.00	100	$         12,000.00
Special processing	$                     45.00	0	$                    -
Total Overheads assigned			$         12,000.00
Production			47,000.00
Overhead cost per unit			$                 0.26