1- Broomfield Company budgeted $9,000,000 of manufacturing overhead for the curr

Question

1- Broomfield Company budgeted $9,000,000 of manufacturing overhead for the current year, and 72,000 hours of direct labor (cost of $65/hour). Production of Product X (100,000 units) consumed $500,000 of direct materials, and 9,000 direct labor hours.



a) If overhead is allocated on the basis of direct labor hours, compute the unit cost of Product X.



b) Assume instead that Broomfield uses an ABC system, with three cost drivers: machine hours, materials handling, and setups. Of the total overhead cost, 60% is in the machine hour pool (40,000 budgeted hours), 25% is in the materials pool (allocated based on $2,500,000 of total materials budgeted to be used), and 15% in the setup pool (100 budgeted setups). In addition to the materials and labor listed above, Product X used 6,000 machine hours and 9 setups. Compute the unit cost of Product X under the ABC system.



c) Comment briefly on the cause(s) of any significant difference between your answers to part a and part b.

Explanation / Answer

a) If overhead is allocated on the basis of direct labor hours, compute the unit cost of Product X.

Direct Materials                                                                               $500,000
Direct Labor (9,000 hours x $65)                                                       $585,000
              Prime Cost                                                                    $1,085,000
Manufacturing Overhead ($9,000,000 x 9,000 hours / 72,000)          $1,125,000
       Total Cost of Product X                                                       $2,210,000

Unit cost of product X = $2,210,000 / 100,000 = $22.10

b) Cost drivers rate
Machine hour rate      60% x $9,000,000   $5,400,000 / 40,000      = $135 per machine hour
Materials Handling     25% x $9,000,000   $2,250,000 / 2,500,000 = $0.9 per dollar of materials used
Setup                        15% x $9,000,000   $1,350,000 / 100            = $13,500 per set upUnit cost of Product X under the ABC system.
Direct Materials        $500,000 / 100,000                 $5.00
Direct Labor             $585,000 / 100,000                 $5.85
Manufacturing Overheads
Machine hour           6,000 x $135 / 100,000            $8.10
Materials handling    $500,000 x 0.9 / 100,000         $4.50
Setups               9 setups x $13,500 / 100,000         $1.22
Total Unit cost of product X                               $24.67

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