Question

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

	Direct Labor-Hours per Unit	Annual Production
Hubs	0.80	19,000	units
Sprockets	0.40	47,000	units

Additional information about the company follows:

1. Hubs require $27 in direct materials per unit, and Sprockets require $16.

2. The direct labor wage rate is $12 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)	$	30,375	135	108	243
Special processing (machine-hours)	$	180,000	3,600	0	3,600
General factory (organization-sustaining)	$	316,000	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

1.

Activity Cost Pool	Activity Rate
Machine setups	$125 per setup
Special processing	$50 per MH

Explanation:

Activity Cost Pool	Overhead Cost	Total cost drivers	Activity Rate
Machine setups	$30,375	243	$125 per setup ($30,375/243)
Special processing	$180,000	3,600	$50 per MH ($180,000/3,600)

2.

	Hubs	Sprockets
Direct Materials	$27	$16
Direct labor	$9.6	$4.8
Overhead	$10.362	$0.287
Unit cost	$46.962	$21.087

Explanation:

	Hubs	Sprockets
Machine setups	$16,875 (135*$125)	$13,500 (108*$125)
Special processing	$180,000 (3,600*$50)
Total overhead cost allocated	$196,875	$13,500
Total units	19,000	47,000
Overhead cost per unit	$10.362 ($196,875/19,000)	$0.287 ($13,500/47,000)

	Hubs	Sprockets
Direct labor hours per unit	0.80	0.40
Wage rate per hour	$12	$12
Direct labor cost	$9.6 (0.8*$12)	$4.8 (0.4*$12)