Question

Fogerty Company makes two products, titanium Hubs and Sprockets. Data regarding the two products follow: Direct Labor-Hours per Unit Annual Production Hubs 0.60 15,000 units Sprockets 0.20 50,000 units Additional information about the company follows:

a. Hubs require $39 in direct materials per unit, and Sprockets require $18.
b. The direct labor wage rate is $12 per hour.
c. Hubs are more complex to manufacture than Sprockets and they require special equipment.
d. The ABC system has the following activity cost pools:
Estimated Activity Activity Cost Pool (Activity Measure) Overhead Cost Hubs Sprockets Total Machine setups (number of setups) $ 28,980 140 112 252 Special processing (machine-hours) $ 92,000 4,600 0 4,600 General factory (organization-sustaining) $ 89,000 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. (Round intermediate calculations and final answers to 2 decimal places.)

Answer 1

Fogerty Company

1. Computation of the activity rate for each activity cost pool:

a. Machine setups = Total machine setups overhead costs/total machine setups

= $28,980/252 = $115 per machine set up

b. Special processing = Total special processing overhead costs/total machine hours

= $92,000/4,600 = $20 per machine hour

c. General factory = $89,000/65,000 = $1.369 per unit produced

2. Determination of the unit product cost of each product using ABC system:

Hubs Sprockets

Total production costs $825,640 $1,101,340

Units produced 15,000 50,000

Unit product cost = $55.04 $22.03

Step-by-step explanation:

a) Data and Calculations:

Activity Cost Pool Overhead Hubs Sprockets Total

(Activity Measure) Costs

Machine setups

(number of setups) $ 28,980 140 112 252

Special processing

(machine-hours) $ 92,000 4,600 0 4,600

General factory

(organization-sustaining) $ 89,000 NA NA NA

Direct labor-hours per unit 0.60 0.20

Total units produced 15,000 50,000 65,000

Direct materials required per unit $39 $18

Direct labor wage rate per hour $12 $12

b) Total direct labor-hours 9,000 10,000 19,000

c) Activity rate for each activity cost pool:

1. Machine setups = Total machine setups overhead costs/total machine setups

= $28,980/252 = $115 per machine set up

2. Special processing = Total special processing overhead costs/total machine hours

= $92,000/4,600 = $20 per machine hour

3. General factory = Total general factory overhead costs divided by total units produced

= $89,000/65,000 = $1.3692 per unit produced

d) Overhead Allocation:

Hubs Sprockets Total

Machine setups $16,100 $12,880 $28,980

Special processing 96,000 0 96,000

General factory 20,540 68,460 89,000

Total overhead costs $132,640 $81,340 $213,980

e) Total costs per product

Hubs Sprockets Total

Direct materials costs $585,000 $900,000 $1,485,000

Direct labor costs $108,000 $120,000 $228,000

Total overhead costs $132,640 $81,340 $213,980

Total production costs $825,640 $1,101,340 $1,926,980

Units produced 15,000 50,000

Unit product cost = $55.04 $22.03

f) Activity based costing system (ABC) is a costing technique that accumulates according to activity pools and allocates costs based on the activities carried out. For example, the general factory overhead costs, could be allocated based on direct labour hours, machine hours, or total units of production. It calculates the allocation rate based on the accepted activity pool.