Scenario 1

 AC approach
Product X Y Z Total
Budgeted production (unit) 20,000 16,000 22,000
Labour hour per unit 2.5 3 2
Total labour hours 50,000 48,000 44,000 142,000

1,377,400
Overhead absorption rate (OAR)= = $9.70 per hour
142,000
Product X ($/unit) Y ($/unit) Z ($/unit)
Direct material 25 28 22
Direct labour 30 36 24
Overhead 9.70 x 2.5= 24.25 9.70x 3= 29.10 9.70x2= 19.40

Total Cost per unit 79.25 93.10 65.40

 ABC approach
Product X Product Y Product Z Total
20,000 16,000 22,000
Direct material cost ( $ per unit) 25 28 22 1,712,000
Direct labour (hour per unit) 2.5 3 2
Direct labour cost ($ per unit, $12 30 36 24
per hour)
Machine hour per unit 1.5 1.25 1.4
Total machine hour 20,000 x 1.5= 16,000 x1.25= 22,000 x1.4=80,800
30,000 20,000 30,800
Batch size (unit) 500 800 400
Number of batch 20,000 16,000 22,000 115
= 40 = 20 = 55
500 800 400
Number of purchase order per 4 5 4
batch
Total number of orders 40 x 4 = 20 x 5= 100 4 x 55= 220 480
160
Cost pool Cost driver $
Machine set up costs Number of batches 280,000
Material ordering costs Number of purchase orders 316,000
Machine running costs Number of machine hours 420,000
General facility costs Number of machine hours 361,400
Total 1,377,400

Activities Cost Rate $ X Y Z

driver
Machine set Number 280,000 2,434.78 x 40= 2,434.78 x 20= 2,434.78 x 55=
= 97,391 48,695.6 133,912.9
up costs of 115
batches 2,434.78
Material Number 316,000 658,33x160= 658,33x100= 658,33x220=
= 105,333 65,833 144,834
ordering of 480
costs purchase 658,33
orders
Machine Number 420,000+361,4009.67x 30,000= 9.67x 20,000= 9.67x 30,800=
running costs of 80,000 290,100 193,400 297,836
& General machine = 9.67
facility costs hours
Total OH ($) 492,824 307,929 576,583

X ($/unit) Y ($/unit) Z ($/unit)

Direct material 25 28 22
Direct labour 30 36 24
OH/unit 492,824 307,929 576,583
= 22.64 = 19.25 = 26.21
20,000 16,000 22,000
ABC cost per unit 25 + 30 + 22.64= 28+36+19.25= 22+24+26.21=
79.64 89.25 72.21