Question

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:

	Mercon			Wurcon
Direct materials cost per unit	$	10.00		$	8.00
Direct labor cost per unit	$	3.00		$	3.75
Direct labor-hours per unit		0.20			0.25
Number of units produced		10,000			40,000

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 $336,000. 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:

	Mercon			Wurcon			Total
Engineering design time (in hours)		4,000			4,000			8,000

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.)

Answer 1

	Mercon	Wurcon	Total
Number of units produced	10000	40000
(*) Direct labor hours per unit	0.20	0.25
Total direct labor hours	2000	10000	12000

1.
	Plantwide predetermined overhead rate = Estimated manufacturing overhead / Estimated total direct labor hours = 336000 / 12000 =	28	per direct labor hour

Calculation of Unit product cost :
	Mercon	Wurcon
Direct materials cost per unit	10.00	8.00
Direct labor cost per unit	3.00	3.75
Manufacturing overhead cost per unit [ Direct labor hours per unit * Plantwide predetermined overhead rate ]	5.60	7.00
Unit product cost	18.60	18.75

2.
	Here , half of the Manufacturing overheads are allocated based on direct labor hours and half are allocated based on engineering design time
		Mercon	Wurcon
		Calculation	Answer	Calculation	Answer
	Overhead allocated based on direct labor hours	(336000*50%*2000/12000)	28000	(336000*50%*10000/12000)	140000
	Overhead allocated based on engineering design time	(336000*50%*4000/8000)	84000	(336000*50%*4000/8000)	84000
	Total overhead allocated	112000		224000

Calculation of unit product cost :
	Mercon	Wurcon
Direct materials cost per unit	10.00	8.00
Direct labor cost per unit	3.00	3.75
Manufacturing overhead per unit [ Total overhead allocated / Number of units produced ]	11.20	5.60
Unit product cost	24.20	17.35