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

$10.00 $8.00

. . $3.0 $3.75

. 0.20 0.25

. 10,000 40,000 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 $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:

Engineering design time

(in hours)

page 179 Mercon Wurcon Total 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.