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 $ 10.00 $ 3.00 0.20 10,000 Wurcon $ 8.00 $ 3.75 0.25 40,000 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 $336,000. 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: Morcon 4,000 Wurcon 4,000 Total 8,000 Engineering design time (in hours) 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

Solution:

		Mercon	Wurcon
1.	Unit product cost under conventional system	$18.60	$18.75
2.	Unit product cost under ABC system	$24.20	$17.35

Total labor hours = Labor hours per unit * Number of units produced

For Mercon = 0.20 * 10,000 = 2,000 hours

For Wurcon = 0.25 * 40,000 = 10,000 hours

Total labor hours = 2,000 + 10,000 = 12,000 hours

Manufacturing overhead costs = $336,000

Overhead rate is computed based on direct labor hours as given in question.

So per hour overhead rate = Manufacturing overhead costs / Direct labor hours

= $336,000 / 12,000 = $28

Per unit overhead costs for Mercon = Rate per hour * Direct labor hours per unit

= $28 * 0.20 = $5.60

Per unit overhead costs for Wurcon = Rate per hour * Direct labor hours per unit

= $28 * 0.25 = $7

Calculation of unit product cost under conventional system

	Mercon	Wurcon
Direct Material cost per unit	$10	$8
Direct Labor cost per unit	$3	$3.75
Overhead cost per unit	$5.60	$7
	$18.60	$18.75

Calculation of per unit overhead cost under activity based costing system

Half of the overhead would be allocated on the basis of direct labor hours.

Overhead based on direct labor hours = Total overhead / 2

= $336,000 / 2 = $168,000

Per hour overhead rate = $168,000 / 12,000 = $14

Per unit overhead costs for Mercon = Rate per hour * Direct labor hours per unit

= $14 * 0.20 = $2.80

Per unit overhead costs for Wurcon = Rate per hour * Direct labor hours per unit

= $14 * 0.25 = $3.50

Overhead based on engineering design time = $336,000 - $168,000 = $168,000

Engineering design time = 8,000 hours

Overhead per hour of engineering design time = $168,000 / 8,000 = $21

Overhead costs for Mercon = Engineering design time * Rate per hour

= 4000 * $21 = $84,000

Per unit overhead based on engineering design time for Mercon = $84,000 / 10,000 units

= $8.40

Overhead costs for Wurcon = Engineering design time * Rate per hour

= 4000 * $21 = $84,000

Per unit overhead based on engineering design time for Wurcon = $84,000 / 40,000 units

= $2.10

Per unit overhead cost for Mercon = $2.80 + $8.40 = $11.20

Per unit overhead cost for Wurcon = $3.50 + $2.10 = $5.60

Calculation of unit product cost under ABC system

	Mercon	Wurcon
Direct material cost per unit	$10	$8
Direct labor cost per unit	$3	$3.75
Overhead cost per unit	$11.20	$5.60
	$24.20	$17.35

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