Reference no: EM13647013

The Manchester Company produces three types of circuit boards; call them X, Y, and Z. The cost accounting system used by Manchester until 2006 applied all costs except direct materials to the products using direct-labor hours as the only cost driver. In 2006, the company undertook a cost study. The study determined that there were six main factors that incurred costs. A new system was designed with a separate cost pool for each of the six factors. The factors and the costs associated
with each are as follows:
1. Direct-labor hours-direct-labor cost and related fringe benefits and payroll taxes
2. Machine hours-depreciation and repairs and maintenance costs
3. Pounds of materials-materials receiving, handling, and storage costs
4. Number of production setups-labor used to change machinery and computer configurations for
a new production batch
5. Number of production orders-costs of production scheduling and order processing
6. Number of orders shipped-all packaging and shipping expenses
The company is now preparing a budget for 2008. The budget includes the following predictions:
Board X Board Y Board Z
Units to be produced 10,000 800 5,000
Direct-materials cost £70/unit £88/unit £45/unit
Direct-labor hours 4/unit 18/unit 9/unit
Machine hours 7/unit 15/unit 7/unit
Pounds of materials 3/unit 4/unit 2/unit
Number of production setups 100 50 50
Number of production orders 300 200 70
Number of orders shipped 1,000 800 2,000
The total budgeted cost for 2008 is £3,752,250, of which £995,400 was direct-materials cost, and the amount in each of the six cost pools defined above is
Cost Pool* Cost
1 £1,391,600
2 936,000
3 129,600
4 160,000
5 25,650
6 114,000
Total £2,756,850
*Identified by the cost driver used.
1. Prepare a budget that shows the total budgeted cost and the unit cost for each circuit board. Use the new system with six cost pools (plus a separate direct application of direct-materials cost).
2. Compute the budgeted total and unit costs of each circuit board if the old direct-labor-hour system had been used.
3. How would you judge whether the new system is better than the old one?