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	$	12.00		$	9.00
Direct labor cost per unit	$	15.00		$	17.00
Direct labor-hours per unit		0.50			3.25
Number of units produced		2,000			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 $560,000. 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:

Answer 1

1. As per Conventional Costing:-

Particulars	Mercon	Wurcon
Direct Material cost Per Unit	$12	$9
Direct Labor cost Per Unit	$15	$17
*Manufacring Overhead Cost Per Unit	$37	$121
Total Unit Product cost	$64	$147

Calculation Table-

Calculations -Manufacring Overhead Cost Per Unit
Total Expected Manufacturing O/H	$560,000
Particulars	Mercon	Wurcon	Total
Direct Labor Hours Per Unit	0.5	3.25	3.75
Number of Unit Produced	2,000	4,000	6,000
Per Unit Manufacturing Cost	37	121

2. As per Activity Based Costing

Particulars	Mercon	Wurcon
Direct Material cost Per Unit	$12	$9
Direct Labor cost Per Unit	$15	$17
*Manufacring Overhead Cost Per Unit -Conventional costing	$19	$61
*Manufacring Overhead Cost Per Unit -Activity Based costing	$47	$47
Total Unit Product cost	$92	$133

Calculations Table

Calculations -Manufacring Overhead Cost Per Unit -Conventional costing
50 % Total Expected Manufacturing O/H	$280,000
Particulars	Mercon	Wurcon	Total
Direct Labor Hours Per Unit	0.5	3.25	3.75
Number of Unit Produced	2,000	4,000	6,000
Per Unit Manufacturing Cost	18.67	60.67

Calculations -Manufacring Overhead Cost Per Unit -Activity Based costing
50 % Total Expected Manufacturing O/H	$280,000
Particulars	Mercon	Wurcon	Total
*Assumed Engineering Design Time @ 180 Minutes per Product	360,000	720,000	1,080,000
Number of Unit Produced	2,000	4,000	6,000
Per Unit Manufacturing Cost	46.67	46.67

Engineering Design Time not provided in Example, so it assumed 180 Minutes Per Unit for each operation