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

1. 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.
2. 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.

3. Identify several possible advantages or disadvantages to Montana of using the ABC method. (Limit 200 words).

Answer 1

Part C	Using ABC system, following are the advantages
	Cost per unit for product X and Y decreased as compared to earlier system of traditional method
	Disadvantage of using ABC is that , cost per unit of product Z increased by using ABC as compared to traditional method.
	So, for product X and Y , ABC is favourable and for product Z , traditional method is better.'