Exercise 4-7 Contrast ABC and Conventional Product Costs [LO4-2, LO4-3, LO4-4] K
ID: 2342050 • Letter: E
Question
Exercise 4-7 Contrast ABC and Conventional Product Costs [LO4-2, LO4-3, LO4-4]
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:
Mercon
Wurcon
Direct materials cost per unit
$
9.00
$
7.00
Direct labor cost per unit
$
15.00
$
17.00
Direct labor-hours per unit
0.40
4.80
Number of units produced
4,000
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 $1,600,000. 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:
Mercon
Wurcon
Total
Engineering design time (in hours)
8,000
8,000
16,000
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
Direct materials cost per unit
$
9.00
$
7.00
Direct labor cost per unit
$
15.00
$
17.00
Direct labor-hours per unit
0.40
4.80
Number of units produced
4,000
8,000
Explanation / Answer
Using the company's conventional costing system
Mercon
Wurcon
Total
Direct labor-hours per unit
0.4
4.8
Number of units produced
4000
8000
Direct labor hours (multiply of above both)
1600
38400
40000
Manufacturing overhead costs
1600000
Total direct labor hours
40000
Overhead rate per labour hour
$ 40.00
Mercon
Wurcon
Direct materials cost per unit
9
7
Direct labor cost per unit
15
17
Overhead per unit (Mercon = 40*0.4) (Wurcon =40*4.8)
16
192
Unit product costs
$ 40.00
$ 216.00
Activity-based costing system
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.
Cost
Cost driver
Total activity
Cost driver rate (cost / total activity)
Overhead
800000
Direct labor hour
40000
$ 20.00
Engineering design cost
800000
Engineering design time
16000
$ 50.00
1600000
Mercon
Wurcon
Overhead general (Mercon =20*1600) (Wurcon =20*38400)
32000
768000
Engineering design cost (Mercon =50*8000) (Wurcon =50*8000)
400000
400000
Total allocated overhead
432000
1168000
Number of units produced
4000
8000
Allocated overhead per unit
108
146
Mercon
Wurcon
Direct materials cost per unit
9
7
Direct labor cost per unit
15
17
Overhead per unit (Mercon = 40*0.4) (Wurcon =40*4.8)
108
146
Unit product costs
$ 132.00
$ 170.00
Using the company's conventional costing system
Mercon
Wurcon
Total
Direct labor-hours per unit
0.4
4.8
Number of units produced
4000
8000
Direct labor hours (multiply of above both)
1600
38400
40000
Manufacturing overhead costs
1600000
Total direct labor hours
40000
Overhead rate per labour hour
$ 40.00
Mercon
Wurcon
Direct materials cost per unit
9
7
Direct labor cost per unit
15
17
Overhead per unit (Mercon = 40*0.4) (Wurcon =40*4.8)
16
192
Unit product costs
$ 40.00
$ 216.00
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