Chapter 4, Problem 7E

Contrast ABC and Conventional Product Costs L04−2, LOt-3, L04−4
Kunkel Company makes two products and uses a conventional costing system in which a single plantwidepredetermined overhead rate is computed based on direct labor-hours. Data for the two products for the upcoming year follow:
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 $336.000. 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:

Compute the unit product costs to the two products using the proposed ABC system.
3. Explain why the product costs differ between the two systems.