Question

Fogerty Company makes two products-titanium Hubs and Sprockets. Data regarding the two products follow: Direct Labor- Hours per Annual Unit Production 0.60 28,000 units 0.20 54,000 units Hubs Sprockets Additional information about the company follows: a. Hubs require $31 in direct materials per unit, and Sprockets require $17. b. The direct labor wage rate is $11 per hour. c. Hubs require special equipment and are more complex to manufacture than Sprockets. d. The ABC system has the following activity cost pools: Activity Activity Cost Pool (Activity Measure) Machine setups (number of setups ) Special processing (machine-hours) General factory (organization-sustaining) Estimated Overhead Cost $ 24,300 $209,000 $157,200 Hubs Sprockets Total 100 80 180 3,800 0 3,800 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

Requirement 1

	Activity rate
Machine setup	$          135.00	Per setup
Special processing	$             55.00	Per machine hour

requirement 2

	Hubs	Sprockets
Direct material	$                    31.00	$                     17.00
Direct labor	$                      6.60	$                        2.20
Overheads	$                      7.95	$                        0.20
Total Cost	$                    45.55	$                     19.40

Working

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Machine setup	Number of setup	$ 24,300	180	$          135.00	Per setup
Special processing	Number of machine hour	$ 209,000	3800	$             55.00	Per machine hour

.

Cost assigned to Hubs
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$        135.00	100.00	$ 13,500
Special processing	$           55.00	3,800.00	$ 209,000
Total Overheads assigned			$ 222,500
Production			28,000.00
Overhead cost per unit			$ 7.95

.

Cost assigned to Sprockets
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$        135.00	80	$ 10,800
Special processing	$           55.00	0	$ 0
Total Overheads assigned			$ 10,800
Production			54,000.00
Overhead cost per unit			$                 0.20