Broomfield Company budgeted $7,200,000 of manufacturing overhead for the current

Question

Broomfield Company budgeted $7,200,000 of manufacturing overhead for the current year, and 50,000 hours of direct labor (cost of $60/hour). Production of Product X (100,000 units) consumed $200,000 of direct materials, and 8,000 direct labor hours.
Assume that Broomfield uses an ABC system, with three cost drivers: machine hours, materials handling, and setups. Of the total overhead cost, 55% is in the machine hour pool (40,000 budgeted hours), 25% is in the materials pool (allocated based on dollars of raw materials used ($1,600,000 total)), and 20% in the setup pool (100 budgeted setups). In addition to the materials and labor listed above, Product X used 5,500 machine hours and 14 setups. Compute the unit cost of Product X under the ABC system.

Explanation / Answer

Machine hour pool = 0.55* 7,200,000 = 3,960,000

3,960,000/40,000 machine hours = $99 per machine hour

Materials pool = 0.25*7,200,000 = 1,800,000

1,800,000/1,600,000 = $1.125 per dollar of raw material

Setup pool = 0.20*7,200,000 = 1,440,000

1,440,000/100 = $14,400 per setup

Costs for product   X:

Direct Materials = $200,000

Direct labor = 8,000*60 = $480,000

Overhead:

5,500 machine hours*$99 per machine hour = $544,500

200,000*$1.125 = $225,000

14 setups*$14,400 per setup = $201,600

Total overhead = 544,500 + 225,000 + 201,600 = $971,100

Total cost = direct materials + direct labor + overhead = 200,000 + 480,000 +971,100 = $1,651,100

Unit cost = total cost/number of units = 1,651,100/100,000 = $16.51

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