Question

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

	Direct Labor-Hours per Unit	Annual Production
Hubs	0.70	26,000	units
Sprockets	0.30	48,000	units

Additional information about the company follows:

1. Hubs require $30 in direct materials per unit, and Sprockets require $16.

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)	$	29,160	135	108	243
Special processing (machine-hours)	$	129,500	3,700	0	3,700
General factory (organization-sustaining)	$	277,400	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

Solution

	Activity rate
Machine setups	$          120.00	Per setup
Special processing	$             35.00	Per machine hour

.

	Hubs	Sprockets
Direct material	$                  30.00	$                     16.00
Direct labor	$                    7.70	$                        3.30
Overheads	$                    5.60	$                        0.27
Total Cost per unit	$                  43.30	$                     19.57

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	$ 29,160	243	$          120.00	Per setup
Special processing	Number of machine hour	$ 129,500	3700	$             35.00	Per machine hour

.

Cost assigned to Hubs
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setups	$        120.00	135.00	$ 16,200.00
Special processing	$           35.00	3,700.00	$ 129500.00
Total Overheads assigned			$           145,700.00
Production			26,000.00
Overhead cost per unit			$ 5.60

.

Cost assigned to Sprockets
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setups	$        120.00	108	$ 12,960
Special processing	$           35.00	0	$ 0
Total Overheads assigned			$             12,960.00
Production			48,000.00
Overhead cost per unit			$                 0.27