Question

Exercise 4-7 Contrast ABC and Conventional Product Costs (L04-2, L04-3, L04-4) 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: Direct materials cost per unit Direct labor cost per unit Direct labor-hours per unit Number of units produced Mercon $ 10.00 $ 7.00 1.40 1,000 Wurcon $ 7.00 $ 10.00 6.80 2,000 These products are customized to some degree for specific customers. Required: 1. The company's manufacturing overhead costs for the year are expected to be $450,000. 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: Engineering design time (in hours) Mercon 2,000 Wurcon 2,000 Total 4,000 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

1. Unit product cost using conventional costing system
Total Direct Labour Hours=Direct labour per unit X number of Unit produced
Mercon	=1.4*1000=	1400	hours
Wurcon	=6.8*2000=	13600	hours
TOTAL		15000	hours
Apportionment of half overhead using ABC system
Mercon= (Total overhead X Product Hours / Total Hours)
= (450,000*1400/15000)
=42000
Wurcon= (Total overhead X Product Hours / Total Hours)
= (450,000*13600/15000)
=408000
Overhead per unit = Total overhead Each product / number of unit produced
Mercon	=42000/1000 =	42
Wurcon	=408000/2000 =204
Unit product cost per unit			Mercon	Wurcon
Direct materials			10.00	7.00
Direct labor			7.00	10.00
Overhead			42.00	204.00
Total			59.00	221.00

2. Unit product cost using ABC system
Total Direct Labour Hours=Direct labour per unit X number of Unit produced
Mercon	=1.4*1000=	1400	hours
Wurcon	=6.8*2000=	13600	hours
TOTAL		15000	hours
Apportionment of overhead using convention system
Mercon= (Total overhead X Product Hours / Total Hours)/2
= (450,000*1400/15000)/2
=42000/2=21000
Wurcon= (Total overhead X Product Hours / Total Hours)/2
= (450,000*13600/15000)/2
=408000/2=204,000
Apportionment of half overhead bases of Engineering design time
Mercon= (Total overhead X Product Design Hours / Total Hours)/2
= (450,000*2000/4000)/2
=225000/2=112500
Wurcon= (Total overhead X Product Design Hours / Total Hours)/2
= (450,000*2000/4000)/2
=225000/2=112500
Overhead per unit = Total overhead Each product / number of unit produced
Mercon	=(21000+112500)/1000 =133.5
Wurcon	=(204000+112500)/2000 =158.25
Unit product cost per unit			Mercon	Wurcon
Direct materials			10.00	7.00
Direct labor			7.00	10.00
Overhead			133.50	158.25
Total			150.50	175.25