The Markertech 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 Markertech 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.
This solution shows computations for activity based costing and traditional costing and then discusses why the cost per unit changed between methods.