Question

Exercise 4-7 Contrast ABC and Conventional Product Costs (L04-2, L04-3, L04-4] 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: Direct materials cost per unit Direct labor cost per unit Direct labor-hours per unit Number of units produced Mercon $ 8.00 $ 13.00 0.40 4,000 Wurcon $ 6.00 $ 16.00 2.80 8,000 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 Wurcon 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 1. Unit product cost under conventional system 2. Unit product cost under ABC system

Answer 1

1) Calculate unit product cost under conventional system

Estimated labor hour = (4000*.40+8000*2.8) = 24000

Overhead rate = 720000/24000 = 30 per hour

	Mercon	Wurcon
Direct material	8	6
Direct labor	13	16
Manufacturing overhead	30*.40 = 12	30*2.8 = 84
Unit product cost	33	106

2) Calculate unit product cost under ABC

	Mercon	Wurcon
Overhead related to Direct labor hour	15*.40 = 6	15*2.8 = 42
Overhead related to Engineer hour	45	22.50
Direct material	8	6
Direct labor	13	16
Unit product cost	72	86.50