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Part 1

ABC

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Part 1

Murphy Ltd.manufactures two types of storage unitsModel X and Model Y. The company currently applies manufacturing overhead to all units on the basis of machine hours. The budgeted overhead for next year is $9,403,720. For the upcoming year, Murphy expects to produce and sell 9,200 units of Model X and 17,250 units of Model Y. Direct material and direct labour costs per unit for Model X are $23 and $32 respectively. For Model Y, the direct materials cost per unit is $27 while direct labour per unit is estimated at $32.

The controller is considering the use of activity-based costing and has determined that the firms overhead can be identified with three activities: setups, machining and parts ordering. Data on these activities follow:

Activity	Activity Driver	Budgeted Use - Model X	Budgeted Use - Model Y
Setups	# of setups	168	276
Machining	Machine hours (MHR)	44,160	62,100
Parts ordering	# of orders	250	150

The firms total overhead of $9,403,720 consists of: setups, $1,780,200 machining, $5,525,520 and parts ordering, $2,098,000

Required: Show all calculations.

1. Compute the budgeted unit manufacturing cost of Model X and Model Y using the companys current overhead costing procedures.

2. Compute the budgeted unit manufacturing cost of Model X storage unit by using activity-based costing.

3. Is the cost of the Model X unit overstated or understated (i.e., distorted) by the current use of machine hours to allocate total manufacturing overhead? By how much?

4. Assume the company actually produced 17,250 units of Model Y using 280 setups, 62,500 machine hours, and 148 orders.

What is the actual cost per unit for Model Y using ABC?