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:

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.

Answer 1

Instructions are below.

Step-by-step explanation:

Giving the following information:

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

A. First, we need to calculate the predetermined overhead rate:

Total direct labor hours= 0.4*4,000 + 4.8*8,000= 40,000

Overhead= 1,600,000

Predetermined manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Predetermined manufacturing overhead rate= 1,600,000/40,000

Predetermined manufacturing overhead rate= $40 per direct labor hour

Now, we can determine the unitary product cost.

Mercon= 9 + 15 + 40*0.4= $37

Wurcon= 7 + 17 + 4.8*40= $216

B.

Mercon Wurcon Total

Engineering design time (in hours) 8,000 8,000 16,000

Now, we have two different allocation rates:

Direct-labor hours= 800,000/40,000= $20 per direct labor hour

Engineer desing= 800,000/16,000= $50 per engineer desing hour

Finally, we can determine the unitary product cost:

Engineer design per unit:

Mercon= 8,000/4,000= 2

Wurcon= 8,000/8,000= 1

Mercon= 9 + 15 + (20*0.4 + 50*2) = $132

Wurcon= 7 + 17 + (20*4.8 + 50*1)= $170