Question

Fogerty Company makes two products, titanium Hubs and Sprockets. Data regarding the two products follow:

Direct labor hours per UnitAnnual Production

Hubs 0.80 Units10000Units

Sprockets 0.40 Units40000 Units

Additional information about the company follows:
a. Hubs require $32 in direct materials per unit, and Sprockets require $18.
b. The direct labor wage rate is $15 per hour.
c. Hubs are more complex to manufacture than Sprockets and they require special processing.
d. The ABC system has the following activity cost pools

Activity cost pool (Activity measure) Overhead
CostHubsSprocketstot
Machine set up ( Number of set ups)$72000100300400
Special processing ( Machine hours)$200000500005000
General factory (Direct labor hours)$81600080001600024000

Required:
1. Compute the activity rate(i.e predetermined overhead state) for each activity cost pool.
2. Determine the unit cost of each product according to the ABC system.

Answer 1

To find the predetermined overhead rates for Fogerty Company's activity cost pools, divide the total overhead cost for each pool by its respective activity measure. Then, calculate the unit cost for each product by adding direct materials, direct labor, and overhead cost based on the activity rates.

Step-by-step explanation:

The Fogerty Company is examining the costs associated with manufacturing titanium Hubs and Sprockets using an Activity-Based Costing (ABC) system. The required calculations are:

1. Compute the activity rate (i.e., predetermined overhead rate) for each activity cost pool.

Machine setup: The overhead cost is $72,000 for 400 setups, so the activity rate is $72,000 / 400 = $180 per setup.

Special processing: The overhead cost is $200,000 for 5,000 machine hours, so the activity rate is $200,000 / 5,000 = $40 per machine hour.

General factory: The overhead cost is $816,000 for 24,000 direct labor hours, so the activity rate is $816,000 / 24,000 = $34 per direct labor hour.

2. Determine the unit cost of each product according to the ABC system.

For Hubs, the unit cost comprises direct materials ($32), direct labor ($15 per hour x 0.80 hours), and applied overhead (specific rates from calculated activity rates).

For Sprockets, the unit cost includes direct materials ($18), direct labor ($15 per hour x 0.40 hours), and applied overhead (specific rates from calculated activity rates).

By applying these calculations, the company can gain a better understanding of the manufacturing cost per unit for each product, which is essential for pricing, budgeting, and strategic decision-making processes.

Answer 2

activitity rate:

`\left[\begin{array}{ccccc}$Activity&$Driver&$cost&$Total&$Rate\\$Machine Setups&setups&72,000&400&180\\$Special processing&$machine hours&200,000&5,000&40\\$General factory&$direct labor hours&816,000&24,000&34\\\end{array}\right]`

sprocked unit cost: $ 38.95

hub units cost: $ 93.00

Step-by-step explanation:

We divide teh cost pool over the total of the cost driver.

This give us the activitty rate.

Then we multiply each rate by the use of each product:

And divide by the total units to get the unti manufacturing overhead

`\left[\begin{array}{ccc}$Activity&$Hubs&$Sprockets\\$Machine Setups&18,000&54,000\\$Special processing&200,000&0\\$General factory&272,000&54,4000\\$Total&490,000&598,000\\$Units&10,000&40,000\\$Overhead per unit&49&14.95\\\end{array}\right]`

Finally we add the cost component:

Sprocked:

materials $ 18 + $ 15 x 0.40 units + $ 14.95 = 38.95

Hubs

materials $ 32 + $ 15 x 0.80 units + $ 49 = 93