FC Company makes two products, titanium Hubs and Sprockets. Data regarding the two products as follows:

Direct Labour Annual Production

Hours Per unit

Hubs 0.80 10,000 units

Sprockets 0.40 40,000 units

Additional information about the company follows:

1. Hubs require $32 in direct materials per unit, and Sprockets require $18
2. The direct labour wage rate is $15 per hour
3. Hubs are more complex to manufacture than Sprockets and they require special equipment.
4. The ABC system has following activity cost pools:

Activity

_______________________

Estmiated Hubs Sprockets Total

Overhead Cost

Machine Setups (no. of setups) $72,000 100 300 400

Special Processing (machine hours) $200,000 5000 0 5,000

General Factory $816,000 NA NA NA

(organization sustaining

Required:

1. Compute the Activity Rate for each activity cost pool. Did you compute an activity rate for all of the activity cost pools? Why?
2. Determine the unit product cost of each product according to the ABC system.
3. Discuss how Activity Based Costing helps bring in efficiency in manufacturing and cost control.
4. Critically discuss as to why are top management support and cross-functional involvement crucial when attempting to implement an activity based costing in an organization.
5. Analyze the limitations of Activity Based Costing.