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	22,000	units
Sprockets	0.40	52,000	units

Additional information about the company follows:

1. Hubs require $33 in direct materials per unit, and Sprockets require $12.

2. The direct labor wage rate is $17 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)	$	19,440	80	64	144
Special processing (machine-hours)	$	80,000	4,000	0	4,000
General factory (organization-sustaining)	$	225,600	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:

1.

Activity cost pool	Estimated overhead cost (a)	Expected activity (b)	Activity rate (a/b)
Machine setups	19,440	144	$135 per set up (19440/144)
Special processing	80,000	4,000	$20 per MH (80000/4000)

2.

Hubs:

Activitycost pool	Activity rate(a)	Activity (b)	ABC Cost (axb)
Machine setups	$135	80setup	10,800 (80x135)
Special processing	$20	4,000 MHs	80,000 (20 x 4000)
Total			$90,800 (10800+80000)

Sprockets:

Activity cost pool	Activity rate (a)	Activity (b)	ABC Cost (axb)
Machine setups	$135	64	8,640 (135 x 64)
Special processing	$20	0	0 (20 x 0)
Total			$8640 (8640+0)

	Hubs	Sprockets
Direct materials	33	12
Direct labour	13.6 (17 x 0.8)	6.8 (17 x 0.4)
Overhead	4.127 (90800/22000)	0.166 (8640/52000)
Unit cost	50.727 (33+13.6+4.127)	18.966 (12+6.8+.166)