Question

lab-section laos ump to pg go book contents S E Ô search ebook EXERCISE 7-13 Computing ABC Product Costs (L07-3, L07–4] Fogerty Company makes two products, titanium Hubs and Sprockets. Data regarding the two products follow Direct Labor-Hours per Unit Annual Production Hubs Sprockets.... 0.80 0.40 1 0,000 units 40,000 units Additional information about the company follows: a. Hubs require $32 in direct materials per unit, and Sprockets require $18. b. The direct labor wage rate is $15 per hour c. Hubs are more complex to manufacture than Sprockets and they require special equipment. d. The ABC system has the following activity cost pools Activity Hubs Total Activity Cost Pool (Activity Measure) Machine setups (number of setups) Special processing (machine-hours) General factory (organization-sustaining)... Estimated Overhead Cost $72.000 $200,000 $810,000 Sprockets 300 100 5.000 NA 400 5.000 NA Required:

Answer 1

Requirement 1

Activity-based concept states that costs should be recognized on the basis of activities which they can be traced back to and not specific blanket rate.

Yes, activity rate is computed for all activity cost pools because it will be logical to allocate costs on the basis of direct link to the cost pool rather than blanket rate.

Activity cost Pool	Estimated overhead cost ($)	Expected activity	Activity rate
	A	B	A /B
Machine setups	72000	400 setups	$ 180 per setup
Special processing	200000	5000 MHs	$ 40 per MH
General factory	816000	24,000 DlHs	$ 34 per DLH

Requirement 2

Firstly, total activity cost of Hubs is computed as follow:

Activity cost Pool	Activity rate	Activity	ABC Cost
	A	B	A X B
Machine setups	$ 180 per setup	100 setups	$18,000
Special processing	$ 40 per MH	5000 MHs	$200,000
General factory	$ 34 per DLH	8000 DLHs	$272,000
		Total	$490,000

Firstly, total activity cost of Sproctors is computed as follow:

Activity cost Pool	Activity rate	Activity	ABC Cost
	A	B	A X B
Machine setups	$ 180 per setup	300 setups	$54,000
Special processing	$ 40 per MH	0	$0
General factory	$ 34 per DLH	16000 DLHs	$544,000
		Total	$598,000

The unit product cost of each product according to ABC system is given below:

	Hubs	Sprockets
Direct materials	$       32.0	$    18.00
Direct labor
Hubs = 15 X 0.8	$       12.0
Sprockets = 15 X0.4		$       6.00
Overhead
490,000/10,000	$       49.0
598,000/40,000		$    14.95
	$       93.0	$    38.95

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