Question

Peabody Company has a single plant, and manufactures three products.
The following table contains per unit data for the three products.
	A	B	C
Raw materials ($)	156	179	185
Direct labor ($)	84	98	70
Machine hours	2.5	2.6	2.1
The following table contains aggregate data for the year for the three products.
	A	B	C
Budgeted production (units)	25,000	18,000	22,000
Number of inspections	250	180	220
Number of setups	100	60	90
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 machine hours.
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).

This is the complete question with the data on the top where it shows Raw Materials for each unit, Direct Labor, Machine Hours,

Answer 1

ANS 1
	A	B	C
Raw materials ($)	156	179	185
Direct labor ($)	84	98	70
manufacturing overhead	223.41	232.34	187.66
	89.36x2.5	89.36x2.6	89.36x2.1
total cost per unit	463.41	509.34	442.66	rounded to two decimal
budgeted overhead rate
13896000/155500	89.3633
total machine hours
	no of units	no of MH per unit	total MH req
A	25000	2.5	62500
B	18000	2.6	46800
C	22000	2.1	46200
	65000		155500
ans 2				product A		product B		product C
	cost	cost driver	activity cost rate	no. of drivers	cost allocated	no. of drivers	cost allocated	no. of drivers	cost allocated
setup	1300000	250	5200	100	520000	60	312000	90	468000
inspection	130000	650	200	250	50000	180	36000	220	44000
machine hours	12466000	155500	80.17	62500	5010450	46800	3751825	46200	3703725
			manufacturing overhead		5580450		4099825		4215725
			no. of units		25000		18000		22000
		manufacturing overhead per unit			223.22		227.77		191.62
activity base costing- cost per unit
	A	B	C
Raw materials ($)	156	179	185
Direct labor ($)	84	98	70
manufacturing overhead	223.22	227.77	191.62
total cost per unit	463.22	504.77	446.62
ans 3
advantages of using ABC;
1 it gives better and more accurate cost per unit than traditional method.
2 it allocates factory overhead more accurate to different products
3 as the cost is more precise and accurate so the profit is also more precise
4 it also tells which cost are wasted
5 it identifies processes which are inefficient
disadvantages
1 it is complex to calculate cost under it as the collection of data is tine consuming
2 the reports from ABC doesn’t always conforms to GAAP and cant be used for external reporting
3 the source data from which it is prepared is not readily available
in nutshell we can say it is better to use ABC techinque as it gives more precise cost and profit of the products
if any doubt please comment