Question

Exercise 4-7 Contrast ABC and Conventional Product Costs [LO4-2, LO4-3, LO4-4) 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: $ $ Vereon 10.00 10.00 0,30 5.000 Direct materials cost per unit Direct labor cost per unit Direct labor-hours per unit Nanber of units produced $ $ Marcon 7.00 11.00 2.25 10.000 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 $720,000. 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 2.000 Wur con 2.000 Total 4.000 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 ſ 1 Unit product cost under conventional system 2. Unit product cost under ABC system

Answer 1

1.)
Companies Unit Cost using Conventional System
		Mercon	Wercon
No. of Units Produced		5000	10000
Direct Labour hours per unit		0.3	2.25
No.of Hours		1500	22500
Overheads =	$720,000.00
Total Hours =	24000
	(1500+22500)
Allocation of Overheads		$45,000.00	$675,000.00
		(1500*720000)/24000	(22500*720000)/24000
Per Unit Manufacturing OH Cost		$9.00	$67.50
		(45000/5000)	(675000/10000)
Per Unit Cost
Materials Cost per Unit		$10.00	$7.00	(Given)
Labour Cost per Unit		$10.00	$11.00	(Given)
Manufacturing OH Cost per Unit		$9.00	$67.50	(Calculated
				Above)
Per Unit Cost		$29.00	$85.50	ANSWER
2.)
Companies Unit Cost using ABC System
Under ABC System, Half of the Allocation would be based on the Direct Labour Hours and other
half would be based on the Engineering Design time.
Allocation of half of Manufacturing OH i.e. 360000$ (720000/2) based on Direct Labour Hours
		Mercon	Wercon
No. of Units Produced		5000	10000
Direct Labour hours per unit		0.3	2.25
No.of Hours		1500	22500
Overheads =	$360,000.00
Total Hours =	24000
	(1500+22500)
Allocation of Overheads		22500	337500
		(1500*360000)/24000	(22500*360000)/24000
Per Unit Manufacturing OH Cost		$4.50	$33.75
		(45000/5000)	(675000/10000)
Allocation of Other half of Manufacturing OH i.e. 360000$ (720000/2) based on
engineering design time
		Mercon	Wercon
No. of Units Produced		5000	10000
Engineering design time(Hours)		2000	2000
Overheads =	$360,000.00
Total Hours =	4000
	(2000+2000)
Allocation of Overheads		180000	180000
		(2000*360000)/4000	(2000*360000)/4000
Per Unit Manufacturing OH Cost		$36.00	$18.00
		(45000/5000)	(675000/10000)
Per Unit Cost
		Mercon	Wercon
Materials Cost per Unit		$10.00	$7.00	(Given)
Labour Cost per Unit		$10.00	$11.00	(Given)
Manufacturing OH Cost per Unit
Under Direct Labour Hours		$4.50	$33.75	(Calculated Above)
Under Engineering Design Time		$36.00	$18.00
Per Unit Cost		$60.50	$69.75	ANSWER
		Mercon	Wercon
Unit Product Cost Under Conventional System		$29.00	$85.50
Unit Product Cost Under ABC System		$60.50	$69.75

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