Question

Exercise 4-7 Contrast ABC and Conventional Product Costs [LO4-2, LO4-3, LO4-4]

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	$	9.00		$	7.00
Direct labor cost per unit	$	15.00		$	17.00
Direct labor-hours per unit		0.40			4.80
Number of units produced		4,000			8,000

These products are customized to some degree for specific customers.

Required:

1. The company's manufacturing overhead costs for the year are expected to be $1,600,000. 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)		8,000			8,000			16,000

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

Using the company's conventional costing system
	Mercon	Wurcon	Total
Direct labor-hours per unit	0.4	4.8
Number of units produced	4000	8000
Direct labor hours (multiply of above both)	1600	38400	40000
Manufacturing overhead costs	1600000
Total direct labor hours	40000
Overhead rate per labour hour	$    40.00
	Mercon	Wurcon
Direct materials cost per unit	9	7
Direct labor cost per unit	15	17
Overhead per unit (Mercon = 40*0.4) (Wurcon =40*4.8)	16	192
Unit product costs	$    40.00	$ 216.00

Activity-based costing system
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.
	Cost	Cost driver	Total activity	Cost driver rate (cost / total activity)
Overhead	800000	Direct labor hour	40000	$    20.00
Engineering design cost	800000	Engineering design time	16000	$    50.00
	1600000
	Mercon	Wurcon
Overhead general (Mercon =20*1600) (Wurcon =20*38400)	32000	768000
Engineering design cost (Mercon =50*8000) (Wurcon =50*8000)	400000	400000
Total allocated overhead	432000	1168000
Number of units produced	4000	8000
Allocated overhead per unit	108	146
	Mercon	Wurcon
Direct materials cost per unit	9	7
Direct labor cost per unit	15	17
Overhead per unit (Mercon = 40*0.4) (Wurcon =40*4.8)	108	146
Unit product costs	$ 132.00	$ 170.00