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	$	10.00		$	7.00
Direct labor cost per unit	$	7.00		$	10.00
Direct labor-hours per unit		1.40			6.80
Number of units produced		1,000			2,000

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 $450,000. 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)		2,000			2,000			4,000

Compute the unit product costs for the two products using the proposed ABC system.

Answer 1

1. Calculation of unit product cost for the two products under company's conventional costing system:

Pre-determined overhead rate = Total manufacturing overhead / Total direct labor hours

Total manufacturing overhead (Given) = $450,000

Direct labor hours for product Mercon = Number of units produced x Direct labor hours per unit = 1,000 units x 1.40 hr per unit

= 1400 hours

Direct labor hours for product Wurcon = Number of units produced x Direct labor hours per unit = 2,000 units x 6.80 hr per unit

= 13,600 hours

Total Direct labor hours = 1,400 hours + 13,600 hours = 15,000 hours

Pre-determined overhead rate = Total manufacturing overhead / Total direct labor hours = $450,000 / 15,000 hours = $30 per hour

Calculation of unit product cost :

Particulars	Mercon	Wurcon
Direct material cost per unit	$10	$7
Direct labor cost per unit	$7	$10
Manufacturing overhead cost per unit	$42 ($30 x 1.40 hours)	$204 ($30 x 6.8 hours)
Total cost per unit	$59	$221

2. Computation of unit product cost of two products under ABC costing system:

Total manufacturing overhead cost = $450,000

Manufacturing overhead allocated to products on the basis of Direct labor hours = $450,000 / 2 = $225,000

Manufacturing overhead allocated to products on the basis of Engineering design time = $450,000 / 2 = $225,000

Pre-determined overhead rate = Manufacturing overhead / Total direct labor hours = $225,000 / 15,000 hours = $15 per hour

ABC recovery rate for cost driver Engineering design time = $225,000 / 4,000 hours = $56.25 per hour

Unit product cost based on ABC costing system will be:

Particulars	Mercon	Wurcon
Manufacturing overhead cost based on Engineering design hours	$112,500 (2,000 hours x $56.25 per hour)	$112,500 (2,000 hours x $56.25 per hour)
Number of units produced	1000	2000
Manufacturing overhead cost per unit	$112.5	$56.25
Direct material cost per unit	$10	$7
Direct labor cost per unit	$7	$10
Manufacturing overhead cost per unit based on Direct labor hours	$21 ($15 x 1.4 hour per unit)	$102 ($15 x 6.8 hour per unit)
Total cost per unit	$150.5 ($112.5 + $10 + $7 + $21)	$175.25 ($56.25 + $7 + $10 + $102)