Question

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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
		A	B	C
	Direct Labor	84.00	98.00	70.00
	Wage Rate	28.00	28.00	28.00
	Direct Labor Hours-PU	3.00	3.50	2.50
	Budgeted Production	25,000	18,000	22,000	Total
	Direct Labor Hours-Total	75,000	63,000	55,000	193,000
	Budgeted Overhead	13,896,000
	Direct Labor Hours-Total	193,000
	Overhead Allocation Rate	72.00
		A	B	C
	Raw Material	156.00	179.00	185.00
	Direct Labor	84.00	98.00	70.00
	Overhead Allocation	216.00	252.00	180.00
	Total Cost Per Unit	456.00	529.00	435.00
			Allocation base
		Cost	A	B	C	Total	Allocation Rate
B	Manufacturing OH Cost	1,300,000	100.00	60.00	90.00	250	5,200.00
	Inspection Cost	130,000	250.00	180.00	220.00	650	200.00
	Machining Cost	12,466,000	62,500	46,800	46,200	155,500	80.17
		13,896,000
	Allocation to Product:	A	B	C
	Manufacturing OH Cost	520,000	312,000	468,000
	Inspection Cost	50,000	36,000	44,000
	Machining Cost	5,010,450	3,751,825	3,703,725
		5,580,450	4,099,825	4,215,725
	Units	25,000.00	18,000.00	22,000.00
	OH cost per Unit	223.22	227.77	191.62
		A	B	C
	Raw Material	156.00	179.00	185.00
	Direct Labor	84.00	98.00	70.00
	Overhead Allocation	223.22	227.77	191.62
	Total Cost Per Unit	463.22	504.77	446.62
C	ABC allocates cost more precisely and accurately. It uses allocation of cost by way of usage