Question

2.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	16,000	units
Sprockets	0.30	50,000	units

Additional information about the company follows:

1. Hubs require $32 in direct materials per unit, and Sprockets require $16.

2. The direct labor wage rate is $15 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)	$	19,890	85	68	153
Special processing (machine-hours)	$	95,000	3,800	0	3,800
General factory (organization-sustaining)	$	236,200	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 :

Determination of activity rate for each activity & allocation of overhead and overhead cost per unit
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Hub	Sprockets
Usage	Allocated Costs	Usage	Allocated Costs
Machine Setups	$19,890.00	Nos of setups	153	$130.00	85	$11,050.00	68	$8,840.00
Special processing	$95,000.00	Machine hours	3800	$25.00	3800	$95,000.00	0	$0.00
General factory	$2,36,200.00	No allocation
Total	$3,51,090.00					$1,06,050.00		$8,840.00
Nos of units						16000		50000
Overhead cost per unit						$6.63		$0.18

Computation of Unit Product Cost - ABC
Particulars	Hubs	Sprockets
Direct Material	$32.00	$16.00
Direct Labor	$10.50	$4.50
Overhead	$6.63	$0.18
Unit Product Cost	$49.13	$20.68