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	$	15.00		$	12.00
Direct labor cost per unit	$	5.00		$	7.00
Direct labor-hours per unit		0.50			6.25
Number of units produced		2,000			4,000

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 $780,000. 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.

(For all requirements, do not round intermediate calculations. Round your final answers to 2 decimal places.)

Answer 1

I
		Direct Labour Hours	26000	(2000 X 0.5+4000 X 6.25)
		Overhead Rate Per Hour	30	(780000/26000)
			Mercon	Wurcon
	A	Direct Material	15	12
	B	Direct Labour	5	7
	C	Overhead	15	187.5
			(30 X 0.5)	(30 X 6.25)
	D=A+B+C	Unit Product Cost Under Conventional System	35.00	206.50
II
			Mercon	Wurcon
	A	Overhead related to direct labor hour	15000	375000
			(390000/26000) X 1000	(390000/26000) X 4000 X 6.25
	B	Overhead related to engineer hour	195000	195000
			(390000/2)	(390000/2)
	C=A+B	Total Overhead	210000	570000
		Unit	2000	4000
		Overhead cost per unit	105	143
		Direct material	15	12
		Direct labor	5	7
		Unit product cost under ABC costing	125.00	161.50