Question

Please answer all parts and show work.

Peabody Company has a single plant, and manufactures three products. The following table contains per unit data for the three products. A B 156 179 185 Raw materials ($) Direct labor ($) Machine hours 98 84 2.5 70 2.1 2.6 The following table contains aggregate data for the year for the three products. Budgeted production (units) Number of inspections Number of setups 25,000 250 8,000 180 60 22,000 220 90 100 Other information: Wage rate is $28/hour Budgeted overhead for the year is $13,896,000. Required: a) Assume that Peabody uses a traditional costing system, with overhead allocated based on direct labor hours. Compute the total cost per unit of the three products. b) Instead assume that Peabody uses an ABC system with three cost drivers: machine hours, inspections, and setups. Manufacturing overhead cost of $1,300,000 is due to setups, and $130,000 to inspections, with the rest allocated to m Compute the total cost per unit of the three products. c) Identify several possible advantages/disadvantages to Peabody of using the ABC system (limit 200 words).

Answer 1

a. Traditional costing:

Direct labor hours per unit of A : $ 84 / $ 28 = 3 hours

Direct labor hours per unit of B : $ 98 / $ 28 = 3.5 hours

Direct labor hours per unit of C = $ 70 / $ 28 = 2.5 hours.

Therefore budgeted number of direct labor hours = 3 dlh x 25,000 units + 3.5 dlh x 18,000 unirs + 2.5 dlh x 22,000 = 193,000 direct labor hours.

Predetermined overhead rate = $ 13,896,000 / 193,000 DLH = $ 72 per DLH.

	A	B	C
Direct Materials	$ 156	$ 179	$ 185
Direct Labor	84	98	70
Manufacturing Overhead	216	252	180
Total Cost per Unit	$ 456	$ 529	$ 435