Question

Montana Company manufactures three products in its plant: X, Y, and Z.
Unit costs and machine hour usage for the three products are:
			X	Y	Z
	Direct materials		$38	$32	$44
	Direct labor		$17	$11	$15
	Machine hours		3	2	4
	Budgeted production (units)		25,000	33,000	14,000
a)	Assume that Montana uses a traditional method of overhead allocation, based on direct labor cost.
	Budgeted overhead for the period is $4,091,800.
	Compute the unit cost of production to the nearest cent for products X,Y, and Z.
b)	Now assume that Montana uses an ABC system with three cost drivers: machine hours, setups, and number of parts.
	Product X requires two setups per period, and requires five distinct parts. Product Y requires four setups, and eight parts. Product Z requires ten setups and fifteen parts.
	Cost pools:
	Setups	528,300
	Machine hours	2,797,400
	Parts	766,100
		4,091,800
	Compute the unit cost of production for products X, Y, and Z using the ABC system.
c)	Identify several possible advantages or disadvantages to Montana of using the ABC method. (Limit 200 words).

Answer 1

A)

Estimated overhead costs	$ 4,091,800.00	$                           4.77	per direct labor Cost
Estimated direct labor hours	858,000.00
Product	DL Hours	Plantwide Oh Rate	Total Overhead Cost	Units Produced	Oh Cost per Unit
X	425,000.00	$                           4.77	$              2,026,824.01	25,000.00	$                   81.07
Y	363,000.00	$                           4.77	$              1,731,146.15	33,000.00	$                   52.46
Z	70,000.00	$                           4.77	$                  333,829.84	14,000.00	$                   23.84
			$              4,091,800.00

	X	Y	Z
Direct Material	$                38.00	$                        32.00	$                            44.00
Direct Labor	$                17.00	$                        11.00	$                            15.00
Overhead	$                81.07	$                        52.46	$                            23.84
Total Unit Cost	$              136.07	$                        95.46	$                            82.84

B)

Activity	Cost	Usage	Allocation Rate
Setups	$    528,300.00	16	$         33,018.75
Machine Hours	$ 2,797,400.00	9	$      310,822.22
Parts	$    766,100.00	28	$         27,360.71

Overhead Allocation
Activity	X	Y	Z
Setups	$                  66,037.50	$ 132,075.00	$      330,187.50
Machine Hours	$                932,466.67	$ 621,644.44	$ 1,243,288.89
Parts	$                136,803.57	$ 218,885.71	$      410,410.71
Total	$            1,135,307.74	$ 972,605.16	$ 1,983,887.10
Units	25,000.00	33,000.00	14,000.00
Oh Per unit	$                          45.41	$            29.47	$              141.71

	X	Y	Z
Direct Material	$                38.00	$                        32.00	$                            44.00
Direct Labor	$                17.00	$                        11.00	$                            15.00
Overhead	$                45.41	$                        29.47	$                          141.71
Total Unit Cost	$              100.41	$                        72.47	$                          200.71

C) Advantages of ABC method-

• The Overhead were assigned as per the activity so the product cost as become accurate than before..
• It helps in identifiying the cost behavior and which also helps us to focus on to reduce the cost.
• If the activity is related to specific department, the cost can be controlled.
• It helps in correct decisioning of product pricing

Disadvantages of ABC Method.

• Identification of cost Drivers is not easy and implementation is also difficult
• The ABC method is expensive and also complex