Direct Labor-Hours per Unit Annual Production Hubs 0.80 10,000 units Sprockets 0.40 40,000 units Additional information about the company follows: Hubs require $32 in direct materials per unit, and Sprockets require $18. The direct labor wage rate is $15 per hour. Hubs require special equipment and are more complex to manufacture than Sprockets. The ABC system has the following activity cost pools:

1. Cost per set up = $72,000 divided by 400 = $180

2. Special processing machine hourly rate = $200,000 divided by 5,000 = $40

3. General factory hourly rate = $816,000 divided by 24,000 = $34

4. Unit cost for Hub = $93

5. Unit per for Sprockets = $38.95

Explanation:

Forgerty company

1.

Computation of Activity rate

Overhead costs

A.

Machine set up = $72,000

Number of set ups = 400

Cost per set up = $72,000 divided by 400 = $180

Hub = $180 x 100 = $18,000

Sprockets = $180 x 300 = $54,000

B.

Special processing Machine = $200,000

Machine hours = 5,000hrs

Cost per machine hour = $200,000 divided by 5,000 = $40

Hub = $40 x 5,000 = $200,000

Sprockets = $40 x 0 = $0

C.

General factory = $816,000

Direct labour hours = 24,000

Cost Direct labour hour = $816,000 divided by 24,000 = $34

Hub = $34 x 8,000 = $272,000

Sprockets = $34 x 16,000 = $544,000

2.

First calculate Direct labour and Direct material cost:

*. Direct labour costs

Direct labour costs = direct labour hours x hourly direct labour wage rate

Hub = 8,000 hours x $15 = $120,000

Sprockets = 16,000 hours x $15 = $240,000

Total Direct labour costs = $120,000 + $240,000 = $360,000

*. Direct Material Costs

Direct material costs = total units produced x direct material cost per unit

Hub = 10,000 x $32 = $320,000

Sprockets = 40,000 x $18 = $720,000

Total Direct labour costs = $320,000 + $720,000 = $1,040,000

A.Cost per unit

From the above,

i. Hub total cost = $18,000 + $200,000 + $272,000 + $120,000 + $320,000 = $930,000

Units produced = 10,000

Unit cost = $930,000 divided by 10,000 units = $93 per unit

ii. Sprockets total cost = $54,000 + $0 + $544,000 + $240,000 + $720,000 = $1,558,000

Units produced = 40,000

Unit cost = $1,558,000 divided by 40,000 units = $38.95

a) Activity Cost pool Activity Rate(A÷B)

Machine set up $180 setups

Special processing $40 MHs

General factory $34 DLHs

b)HUBS

Activity Cost pool ABC costs (A×B)

Machine set up $18,000 setups

Special processing $200,000 MHs

General factory $272,000 DLHs

Total $490,000

SPROCKETS

Activity Cost pool ABC costs (A×B)

Machine set up $54,000 setups

Special processing $0 MHs

General factory $544,000 DLHs

Total $ 598,000

DIRECT MATERIALS AND DIRECT LABOR

Hubs

Unit cost $93.00

Sprockets

Unit cost $38.95

Explanation:

a) Activity for each cost pool

Activity cost pool Estimated overhead cost (A)

Machine set up $72,000

Special processing $200,000

General factory $816,000

Activity Cost pool Expected activity (B)

Machine set up $400 setups

Special processing $500 MHs

General factory $24,000 DLHs

Activity Cost pool Activity Rate(A÷B)

Machine set up $180 setups

Special processing $40 MHs

General factory $34 DLHs

b). The unit cost of each product according to the ABC system, including direct materials and direct labor

HUBS

Activity Cost pool Activity Rate(A)

Machine set up $180 setups

Special processing $40 MHs

General factory $34 DLHs

Activity Cost pool Activity Rate(B)

Machine set up $100 setups

Special processing $5,000 MHs

General factory $8,000 DLHs

Activity Cost pool ABC costs (A×B)

Machine set up $18,000 setups

Special processing $200,000 MHs

General factory $272,000 DLHs

Total $490,000

SPROCKETS

Activity Cost pool Activity Rate(A)

Machine set up $180 setups

Special processing $40 MHs

General factory $34 DLHs

Activity Cost pool Activity Rate(B)

Machine set up $300 setups

Special processing $0 MHs

General factory $16,000 DLHs

Activity Cost pool ABC costs (A×B)

Machine set up $54,000 setups

Special processing $0 MHs

General factory $544,000 DLHs

Total $ 598,000

Hubs, Sprockets

Direct materials $32.00(Hubs) $18.00(sprockets)

Direct labor:$15 per DLH × 0.80 DLHs per unit 12.00 (Hubs)

$15 per DLH × 0.40 DLHs per unit 6.00 (Sprockets)

Overhead:

$490,000 ÷ 10,000 unit 49.00(Hubs)

$598,000 ÷ 40,000 units 14.95(Sprocket)

Unit cost $93.00 (Hubs) $38.95 (Sprockets)

$32.00+$12.00+$49.00=$93 Hubs Unit cost

$18.00+$6.00 +$14.95=$38.95 Sprockets Unit cost

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