Question

Exercise 4-7 Contrast ABC and Conventional Product Costs (L04-2, LO4-3, LO4-4] 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: points Direct materials cost per unit Direct labor cost per unit Direct labor-hours per unit Number of units produced Mercon $ 10.00 $ 3.00 0.20 10,000 Wurcon $ 8.00 $ 3.75 0.25 40,oo eBook Print These products are customized to some degree for specific customers. References Required: 1. The company's manufacturing overhead costs for the year are expected to be $336,000. 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 4,000 Engineering design time (in hours) Wurcon 4,000 Total 8,000 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.) Mercon Wurcon 1. Unit product cost under conventional system 2. Unit product cost under ABC system

Answer 1

Solution:

1.) The unit product cost under the company's conventional costing system:

	Mercon	Wurcon	Total
Number of units produced (a)	10,000	40,000
Direct labor - hour per unit (b)	0.20	0.25
Total direct - labor hours (a) × (b)	2,000	10,000	12,000

Total manufacturing overhead (a)	$336,000
Total direct labor - hours (b)	12,000 DLHs
Predetermined overhead rate (a)÷(b)	$28 per DLH($336,000/12,000DLHs)

	Mercon	Wurcon
Direct materials	$10.00	$8.00
Direct labor	$3.00	$3.75
Manufacturing overhead applied:
0.20 DLH per unit ×$28 per DLH	$5.60
0.25 DLH per unit × $28 per DLH		$7.00
Unit product cost	$18.60	$18.75

2.) The unit product cost with the proposed ABC system can be comucompas follows:

Activity cost pool	Estimated overhead costs (a)	Expected Activity (b)	Activity rate (a) ÷ (b)
Labor related	$168,000	12,000 direct labor hours	$14 per direct labor hour
Engineering design	$168,000	8,000 engineering hours	$21 per engineering hour
	$336,000

* The total manufacturing overhead costs is split evenly between the two activity cost pools.

Manufacturing overhead is assigned to the two products as follows:

Mercon:
Activity cost pool	Activity Rate (a)	Activity (b)	ABC Cost (a) ×(b)
Labor related	$14	2,000 DLHs	$28,000
Engineering design	$21	4,000 engineering hours	$84,000
Total			$112,000

Wurcon:
Activity cost pool	Activity Rate (a)	Activity (b)	ABC cost (a) × (b)
Labor related	$14 per DLH	10,000 DLHs	$140,000
Engineering design	$21per engineering hour	4,000 Engineering hours	$84,000
Total			$224,000

	Mercon	Wurcon
Direct materials	$10.00	$8.00
Direct labor	$3.00	$3.75
Manufacturing overhead:
Mercon: $112,000/10,000 units	$11.20
Wurcon: $224,000/ 40,000 units		$5.60
Unit product cost	$24.20	$17.35

		Mercon	Wurcon
1	Unit product cost under conventional system	$18.60	$18.75
2.	Unit product cost under ABC system	$24.20	$17.35