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)	Number Of Direct Labor Hours =[10000 units *0.20 per unit ]+ [40000 units *0.25 per unit ]
		=12000 hours
	Predetermied Overhead Rate = $336000/12000
		=$28 per hour
		Mercon	Wurcon
	Direct materials cost per unit	$        10.00	$          8.00
	Direct labor cost per unit	$          3.00	$          3.75
	Overhead cost	$              5.60	$              7.00
		($28*0.20 hr)	($28*0.25 hr)
	Unit Product Cost	$           18.60	$           18.75
2)	Predetermied Overhead Rate = $168000/12000
		=$14 per hour
	&
	=$168000/8000 Engineering design hours
	=$21
	Overhead Cost Allocation
		Mercon	Wurcon
A	Labor Hours Per unit	0.2	0.25
B	Predetermined rate per labor hour	$           14.00	$           14.00
C	Allocation based on labor hours (A*B)	$              2.80	$              3.50
D	Engineering design hours per unit	0.4	0.1
E	Predetermined rate per Eng hour	21	21
F	Allocation based on Eng hours (D*E)	8.40	$              2.10
	Total Overhead Per unit (C+F)	$           11.20	$              5.60
Unit Cost
		Mercon	Wurcon
	Direct materials cost per unit	$        10.00	$          8.00
	Direct labor cost per unit	$          3.00	$          3.75
	Overhead cost	$           11.20	$              5.60
	Unit Product Cost	$           24.20	$           17.35

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