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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	$           98	$           70
Wage rate	$           28	$           28	$           28
Direct labor hours per unit	3	3.5	2.5
Budgeted Production	25000	18000	22000
Total Direct labor hours	75000	63000	55000	193000

Pre determined overhead rate = $13,896,000 / 193000 = $72 per labor hour

	A	B	C
Direct labor hours per unit	3	3.5	2.5
Pre determined Overhead rate	$           72	$           72	$           72
Overhead per unit	$        216	$        252	$        180
Raw Material	$        156	$        179	$        185
Direct labor	$           84	$           98	$           70
Total cost per unit	$        456	$        529	$        435

b.

Cost Driver	Cost	Product A	Product B	Product C	Total	Rate per cost driver
Machine Setup	$        1,300,000	100	60	90	250	$ 5,200.00
Number of Inspections	$            130,000	250	180	220	650	$      200.00
Number of machine hours	$      12,466,000	62500	46800	46200	155500	$        80.17

	A	B	C
Overhead allocated
Machine Setup	$            520,000	$            312,000	$         468,000
Number of Inspections	$              50,000	$              36,000	$            44,000
Number of machine hours	$        5,010,450	$        3,751,825	$      3,703,725
Raw Material	$        3,900,000	$        4,475,000	$      4,625,000
Direct labor	$        2,100,000	$        1,764,000	$      1,540,000
Total cost	$      11,010,450	$        9,990,825	$      9,868,725
Budgeted Production	25000	18000	22000
Total cost per unit	$              440.42	$              555.05	$            448.58