Question

a) Assume that Peabody uses a traditional costing system, with overhead allocated based on direct labor hours.
Compute the total cost per unit of each 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 $130,000 to inspections, with the rest allocated to machine hours. Compute the total cost per unit of the three products. The following table contains per unit data for the three products. A B C Raw materials ($) 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. al cost per unit of the three products.

Answer 1

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Peabody
Calculation of labor hours	Product A	Product B	Product C	Total	Note
Direct Labor cost per unit	84.00	98.00	70.00		A
Wage rate per hour	28.00	28.00	28.00		B
Labor hour per unit	3.00	3.50	2.50		C=A/B
Budgeted production (units)	25,000.00	18,000.00	22,000.00		D
Labor hours used	75,000.00	63,000.00	55,000.00	193,000.00	E=C*D

Answer a
Calculation of Predetermined OH Rate				Total	Note
Total Direct Labor Hours				193,000.00	See E
Total Manufacturing overhead				13,896,000.00	F
Predetermined OH Rate				72.00	G=F/E

Allocated OH as per Predetermined OH Rate	Product A	Product B	Product C	Total	Note
Total Direct Labor Hours	3.00	3.50	2.50		See C
Predetermined OH Rate	72.00	72.00	72.00		See G
Allocated OH	216.00	252.00	180.00	648.00	H=G*C

Product cost	Product A	Product B	Product C		Note
Direct Materials	156.00	179.00	185.00
Direct Labor	84.00	98.00	70.00
Allocated OH per unit	216.00	252.00	180.00		See H
Product cost	456.00	529.00	435.00		I

Answer b
Calculation of machine hours	Product A	Product B	Product C	Total	Note
Machine hour per unit	2.50	2.60	2.10		J
Budgeted production (units)	25,000.00	18,000.00	22,000.00		See D
Machine hours used	62,500.00	46,800.00	46,200.00	155,500.00	K=J*D

		L				M
Calculation of ABC rates for overhead			Activity used	N=L/M
Activity cost pool	Cost Driver	Cost	Product A	Product B	Product C	Total	ABC rates
Machine hours used	Machine hours	12,466,000.00	62,500.00	46,800.00	46,200.00	155,500.00	80.17
Number of inspections	Number of inspections	130,000.00	250.00	180.00	220.00	650.00	200.00
Number of setups	Number of setups	1,300,000.00	100.00	60.00	90.00	250.00	5,200.00
Total Cost assigned		13,896,000.00

		See N	O	P=N*O	Q	R=N*Q	S	T=N*S
Allocation table			Product A	Product B	Product C
Activity cost pool	Activity Measure	ABC Rates	Activity used	Cost assigned	Activity used	Cost assigned	Activity used	Cost assigned
Machine hours used	Machine hours	80.17	62,500.00	5,010,450.16	46,800.00	3,751,825.08	46,200.00	3,703,724.76
Number of inspections	Number of inspections	200.00	250.00	50,000.00	180.00	36,000.00	220.00	44,000.00
Number of setups	Number of setups	5,200.00	100.00	520,000.00	60.00	312,000.00	90.00	468,000.00
Total Cost assigned				5,580,450.16		4,099,825.08		4,215,724.76	U
Budgeted production (units)				25,000.00		18,000.00		22,000.00
Cost assigned per unit				223.22		227.77		191.62

Product cost- ABC System	Product A	Product B	Product C	Note
Direct Materials	156.00	179.00	185.00
Direct Labor	84.00	98.00	70.00
Allocated OH per unit	223.22	227.77	191.62	See U
Product cost	463.22	504.77	446.62