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: Direct materials cost per unit Direct labor cost per unit Direct labor-hours per unit Number of units produced Mercon $ 8.00 $ 10.00 2.00 1,000 Wurcon $ 6.00 $ 11.00 7.00 2,000 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 $640,000. 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: Engineering design time (in hours) Mercon 1,000 Wurcon 1,000 Total 2,000 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.) Mercon Wurcon 1. Unit product cost under conventional system 2. Unit product cost under ABC system

Answer 1

1) Direct labor hours = 1000*2+2000*7 = 16000

Overhead rate per hour = 640000/16000 = 40 per hour

	Mercon	Wurcon
Direct material	8	6
Direct labor	10	11
Overhead	40*2 = 80	40*7 = 280
Unit product cost under conventional system	98	297

2) Calculate unit product cost under ABC costing

	Mercon	Wurcon
Overhead related to direct labor hour	40000	280000
Overhead related to engineer hour	160000	160000
Total Overhead	200000	440000
Unit	1000	2000
Overhead cost per unit	200	220
Direct material	8	6
Direct labor	10	11
Unit product cost under ABC costing	218	237