Question

Automotive Products ​(AP​) designs and produces automotive parts. In 2017​, actual variable manufacturing overhead is $ 308,600. AP's simple costing system allocates variable manufacturing overhead to its three customers based on​ machine-hours and prices its contracts based on full costs. One of its customers has regularly complained of being charged non-competitive​ prices, so AP's controller Declan Smith realizes that it is time to examine the consumption of overhead resources more closely. He knows that there are three main departments that consume overhead​ resources: design, ​ production, and engineering. Interviews with the department personnel and examination of time records yield the following detailed​ information:

			Usage of Cost Drivers by Customer
			Contract
		Manufacturing	Rural	Janek	Island
Department	Cost Driver	Overhead in 2017	Motors	Motors	Auto
Design	CAD-design-hours	$39,000	110	200	80
Engineering	Engineering-hours	29,600	70	60	240
Production	Machine-hours	240,000	120	2,800	1,080
Total		$308,600

1.	Compute the manufacturing overhead allocated to each customer in 20172017 using the simple costing system that uses​ machine-hours as the allocation base.
2.	Compute the manufacturing overhead allocated to each customer in 20172017 using​ department-based manufacturing overhead rates.

Answer 1

1) Computation of the Allocation of the manufacturing overhead to each customer Using simple costing system that uses machine hours as basis of allocation.

Actual Plant wide variable MOH rate based on machinehours, = Total Manufacturing Overheads ÷ Total No. of Machine Hours

= $308,600 ÷ 4,000

= $77.15 per machine hour

Note : Total No. of Machine Hours = (120+2800+1080)

=4000 hrs

Particulars	Rural	Janek	Island	Total
Variable manufacturing overhead, allocated based on machine hours ($77.15 × 120; $77.15 × 2,800; $77.15 × 1,080)	$9,258	$216020	$$83,322	$308,600

2) Computation of  the manufacturing overhead allocated to each customer in 2017 using department-based manufacturing overhead rates.

Department	Manufacturing Overheads	Total Driver Unit	Rate	per driver unit
Design	$39,000	390	$100	per CAD-design hour
Production	$29,600	370	$80	per engineering hour
Engineering	$240,000	4,000	$60	per machine hour

Allocation of the Manufacturing Overheads :

PARTICULARS	Rural	Janek	Island	Total
Design-related overhead: allocated on CAD-design hours (110 × $100; 200 × $100; 80 × $100)	$11000	$20000	$8000	$39000
Production-related overhead : allocated on engineering hours (70 × $80; 60 × $80; 240 × $80)	$5,600	$4,800	$19,200	$29,600
Engineering-related overhead: allocated on machine hours (120 × $60; 2,800 × $60; 1,080 × $60)	$7,200	$168000	$64800	$240000
TOTAL	$23800	$192800	$92000	$308600