Reference no: EM132480966

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:

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 the three products.

Question 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.

Question c) Identify several possible advantages/disadvantages to Peabody of using the ABC system