Question

Fogerty Company makes two products—titanium Hubs and Sprockets. Data regarding the two products follow:

	Direct Labor-Hours per Unit	Annual Production
Hubs	0.90	25,000	units
Sprockets	0.50	46,000	units

Additional information about the company follows:

1. Hubs require $31 in direct materials per unit, and Sprockets require $10.

2. The direct labor wage rate is $13 per hour.

3. Hubs require special equipment and are more complex to manufacture than Sprockets.

4. The ABC system has the following activity cost pools:

	Estimated		Activity
Activity Cost Pool (Activity Measure)	Overhead Cost		Hubs	Sprockets	Total
Machine setups (number of setups)	$	25,515	135	108	243
Special processing (machine-hours)	$	156,000	3,900	0	3,900
General factory (organization-sustaining)	$	252,500	NA	NA	NA

Required:

1. Compute the activity rate for each activity cost pool.

2. Determine the unit product cost of each product according to the ABC system.

Answer 1

Requirement 1

Activity Cost Pool	Activity rate
Machine setup	$          105.00	Per setup
Machining	$             40.00	Per machine hour

Working

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Machine setup	Number of setup	$        25,515.00	243	$          105.00	Per setup
Machining	Number of machine hour	$      156,000.00	3900	$             40.00	Per machine hour

Requirement 2

	Hubs	Sprockets
Direct material	$                    31.00	$                     10.00
Direct labor	$                    11.70	$                        6.50
Overheads	$                      6.81	$                        0.25
Total Cost per unit	$                    49.51	$                     16.75

Working

Cost assigned to Hubs
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$                   105.00	135.00	$         14,175.00
Machining	$                     40.00	3,900.00	$       156,000.00
Total Overheads assigned			$       170,175.00
Production			25,000.00
Overhead cost per unit			$ 6.81

.

Cost assigned to Sprockets
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Machine setup	$                   105.00	108	$         11,340.00
Machining	$                     40.00	0	$                    -
Total Overheads assigned			$         11,340.00
Production			46,000.00
Overhead cost per unit			$                 0.25