Question

Activity-Based Absorption Costing

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

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 processing.

d. The company’s activity-based absorption costing system has the following activity cost pools:

Required:

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

2. Compute the unit product cost for Hubs and Sprockets using activity-based absorption costing.

Answer 1

Activity Based Costing (ABC)

Activity-Based Costing is the process of assigning costs to products and tasks based on the activities. Comparing to traditional cost accounting activity based costing is more accurate. Based on the activities overhead cost can be allocated. ABC is a type of costing where cost to products and services are allocated based on the activities of all products and services based on the actual consumption.

Absorption costing:

Under absorption costing, all production costs are absorbed in the inventory and reported in the Balance sheet. The costs are expensed as cost of goods sold at the time of actual sale.

1.

Calculate the overhead assigned between two products:

Hubs:

Activity cost pool	Activity rate (A)	Expected activity (B)	ABC cost (A×B)
Machine setups	$180 per setup	100 setups	$18,000
Special processing	$40 per M.hour	5,000 Machine hours	$200,000
General factory	$34 per L.hour	8,000Labor hours	$272,000
Total ABC cost			$490,000

Therefore, the calculated total ABC cost is .

Sprockets:

Activity cost pool	Activity rate (A)	Expected activity (B)	ABC cost (A×B)
Machine setups	$180 per setup	200 setups	$54,000
Special processing	$40 per Machine hour	0 Machine hours	$0
General factory	$34 per Labor hour	16,000Labor hours	$544,000
Total ABC cost			$598,000

Therefore, the calculated total ABC cost is .

Working note:

Calculate of activity rate.

Activity cost pool	Estimated overhead (A)	Expected activity (B)	Activity rate (C= A÷B)
Machine setups	$72,000	400 setups	$180 per setup
Special processing	$200,000	5,000 Machine hours	$40 per Machine hour
General factory	$816,000	24,000Labour hours	$34 per Labor hour

2.

Calculate each product unit cost:

Particulars	Hubs	Sprockets
Direct materials	$32	$18
Direct labor	$12	$6
Manufacturing overhead	$49	$14.95
Unit product cost	$93	$38.95

Therefore, the calculated unit product cost of hubs is and sprockets is .

Note:

DLH: Direct Labour Hours