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: Direct materials cost per unit Direct labor cost per unit Direct labor-hours per unit Number of units produced Mercon $ 15.00 $ 5.00 @.50 2,000 Wurcon $12.00 $ 7.00 6.25 4,000 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 $780,000. 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 $ 35.00 Wurcon $ 206.50 1. Unit product cost under conventional system 2. Unit product cost under ABC system

Answer 1

1	Computation of Overhead Cost per unit of driver
	Activity Driver	Overhead Cost	Driver units	Overhead Cost per driver unit
	Direct labour hours	$780000/2 = $390000	(0.5*2000)+(6.25*4000) = 26000	$                           15.00
	Engineering design time	$780000/2 = $390000	4000	$                           97.50
	Computation of Total Cost Based on ABC Costing approach
		Mercon		Wurcon
	Direct Material	=($15*2000) =	$                30,000.00	=($12*4000) =	$         48,000.00
	Direct labour	=($5*2000) =	$                10,000.00	=($7*4000) =	$         28,000.00
	Manufacturing Overhead :
	Direct labour related	=($15*0.5*2000) =	$                15,000.00	=($15*6.25*4000) =	$       375,000.00
	Engineering design time related	=($97.5*2000) =	$              195,000.00	=($97.5*2000) =	$       195,000.00
	Total cost		$              250,000.00		$       646,000.00
	Total Cost per unit of Mercon = Total Cost/units produced =$250000/2000 = $125
	Total Cost per unit of Wurcon = Total Cost/units produced =$646000/4000 = $161.5

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