The Liverpool Company produces three types of circuit boards; call them Alpha, Beta and Gamma. The cost accounting system used by Liverpool until 2009 applied all costs except direct materials to the products using direct-labour hours as the only cost driver. In 2009, 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-labour hours – direct-labour 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 – labour 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 2010. The budget includes the following predictions:

The total budgeted cost for 2010 is £3,866,250, of which £995,400 was direct-materials cost and the amount in each of the six cost pools defined above is as follow:

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-laborious system had been used.

3. How would you judge whether the new system is better than the old one?

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Units to be produced Direct-materials cost Direct-labour hours Machine hours Pounds of materials Number of production setups Number of production orders Number of orders shipped Alpha 10,000 £70/unit 4/unit 7/unit 3/unit 100 300 1,000 Beta 800 £88/unit 18/unit 15/unit 4/unit 50 200 800 Gamma 5,000 £45/unit 9/unit 7/unit 2/unit 50 70 2,000