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

1. Computation of unit product costs for the two products using company's conventional costing system:-
A. Computation of Single Plantwide Manufacturing overhead rate :-
	Estimated Total manufacturing Overheads			$             336,000
	Estimated total Direct labor hours
	Product	Direct labor-hours per unit	Number of units produced	Estimated Total Direct labor-hours
	a	b	c	d = b*c
	Mercon	0.20	10,000	2,000	Direct labor-hours
	Wurcon	0.25	40,000	10,000	Direct labor-hours
	Estimated total Direct labor hours			12,000	Direct labor-hours
	Single Plantwide Manufacturing overhead rate		=	Estimated Total manufacturing Overheads
				Estimated total Direct labor hours
			=	$336,000
				12000
			=	$28.00	per Direct labor-hour
B. Computation of Overhead Cost Per unit:-
	Product	Activity Driver		Plantwide OH Rate		Overhead Cost
	a	d = b*c		c		d = b×c
	Mercon	2,000	Direct labor-hours	$28.00	per Direct labor-hour	$                        56,000
	Wurcon	10,000	Direct labor-hours	$28.00	per Direct labor-hour	$                      280,000
C. Computation of Unit product costs :-
			Product
			Mercon		Wurcon
	No. of units produced and sold		10000		40000
			Per Unit	Total	Per Unit	Total
	Direct Material Cost		$                   10.00	$             100,000	$                                8.00	$                      320,000
	Direct labor Cost		$                     3.00	$               30,000	$                                3.75	$                      150,000
	Overhead Cost		$                     5.60	$               56,000	$                                7.00	$                      280,000
	Unit product costs		$                   18.60	$             186,000	$                              18.75	$                      750,000
2. Computation of unit product costs for the two products using activity based costing system:-
A. Computation of Cost per driver :-
Activity cost pool	Activity measures (Cost Drivers)	Estimated Overhead Cost	Expected Activity			Cost per driver
			Mercon	Wurcon	Total
a	b	c	d	e	f	g = c/f
Cost Pool 1 (half of $336000)	Direct labor-hours	$              168,000	2,000	10,000	12,000	$                          14.00
Cost Pool 2 (half of $336000)	Engineering design hours	$              168,000	4,000	4,000	8,000	$                          21.00
Total Manufacturing Overhead Cost		$             336,000
B. Computation of Overhead Cost Per unit:-
	Overhead Assigned	Activity Driver			Cost per driver	Total Overhead Cost
	a	b			c	d = b×c
	Mercon
	Cost Pool 1 (half of $336000)	2,000	Direct labor-hours		$                              14.00	$                        28,000
	Cost Pool 2 (half of $336000)	4,000	Engineering design hours		$                              21.00	$                        84,000
					Total	$                      112,000
					Units Produced	10,000
					Overhead Cost per Unit	$                          11.20
	Wurcon
	Cost Pool 1 (half of $336000)	10,000	Direct labor-hours		$                              14.00	$                      140,000
	Cost Pool 2 (half of $336000)	4,000	Engineering design hours		$                              21.00	$                        84,000
					Total	$                      224,000
					Units Produced	40,000
					Overhead Cost per Unit	$                             5.60
C. Computation of Unit product costs:-
			Product
			Mercon		Wurcon
	No. of units produced		10000		40000
			Per Unit	Total	Per Unit	Total
	Direct Material Cost		$                   10.00	$             100,000	$                                8.00	$                      320,000
	Direct labor Cost		$                     3.00	$               30,000	$                                3.75	$                      150,000
	Overhead Cost		$                   11.20	$             112,000	$                                5.60	$                      224,000
	Unit product costs		$                   24.20	$             242,000	$                              17.35	$                      694,000

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