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Conventional Product costs and ABC accounting

Computing unit product costs for two products using a conventional costing system and also computing using an activity based costing system.

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A company makes two products and uses a conventional costing system in which a single plantwise 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 $10.00 $8.00
Direct labor-cost per unit $3.00 $3.75
Direct labor-hours per unit $0.20 $0.25
Number of units produced 10,000 40,000

These products are customized to some degree for specific customers.

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 fir 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) 4,000 4,000 8,000

Compute the unit product costs for the two products using the proposed ABC system.

3.) Explain why the product costs differ between the two systems.

Solution Summary

The solution examines conventional product costs and ABC accounting. Why the product costs differs between the two systems are determined.

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