Question

Way Cool produces two different models of air conditioners. The company produces the mechanical systems in its components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow.

Process	Activity	Overhead Cost				Driver	Quantity
Components	Changeover		$	500,000		Number of batches	800
	Machining			279,000		Machine hours	6,000
	Setups			225,000		Number of setups	120
			$	1,004,000
Finishing	Welding		$	180,300		Welding hours	3,000
	Inspecting			210,000		Number of inspections	700
	Rework			75,000		Rework orders	300
			$	465,300
Support	Purchasing		$	135,000		Purchase orders	450
	Providing space			32,000		Number of units	5,000
	Providing utilities			65,000		Number of units	5,000
			$	232,000

   
Additional production information concerning its two product lines follows.

	Model 145			Model 212
Units produced		1,500			3,500
Welding hours		800			2,200
Batches		400			400
Number of inspections		400			300
Machine hours		1,800			4,200
Setups		60			60
Rework orders		160			140
Purchase orders		300			150

  
Required:
1. Determine departmental overhead rates and compute the overhead cost per unit for each product line. Base your overhead assignment for the components department on machine hours. Use welding hours to assign overhead costs to the finishing department. Assign costs to the support department based on number of purchase orders.
2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $250 for Model 145 and $180 for Model 212.
3. If the market price for Model 145 is $820 and the market price for Model 212 is $480, determine the profit or loss per unit for each model.

Answer 1

Answer:

a.

Components department
Overhead costs	1,004,000	167.33	per Machine hours
Machine hours	6,000
Finishing department
Overhead costs	465,300	155.10	per Welding hours
Welding hours	3,000
Support department
Overhead costs	232,000	515.56	per purchase orders
Number of purchase orders	450

Model 145	Activity Driver	Departmental OH Rate	Total Overhead Cost
Components	1,800	167.33	301,200.00
Finishing	800	155.10	124,080
Support	300	515.56	154,666.67
Total Overhead Cost			579,946.67
Units Produced			1,500
Overhead cost per unit			386.63

Model 212	Activity Driver	Departmental OH Rate	Total Overhead Cost
Components	4,200	167.33	702,800.00
Finishing	2,200	155.10	341,220
Support	150	515.56	77,333.33
Total Overhead Cost			1,121,353.33
Units Produced			3,500
Overhead cost per unit			320.39

b.

	Model 145	Model 212
Materials and Labor per unit	$250.00	$180.00
Overhead per unit	386.63	320.39
Total cost per unit	636.63	500.39

c.

	Model 145	Model 212
Price per unit	$820.00	$480.00
Cost per unit	636.63	500.39
Profit (loss) per unit	$183.37	($20.39)

Calculation:

Here we need to determine departmental overhead rates and compute the overhead cost per unit for each product line. There are three departments - Components department, Finishing department and Support department.

For the Components department, we need to take the total Overhead costs and divide with the Machine hours.

Overhead costs / Machine hours = 1,004,000 / 6000 = 167.33

For the Finishing department, we need to take the total Overhead costs and divide with the Machine hours.

Overhead costs / Machine hours = 465,300 / 3000 = 155.10

For the Support department, we need to take the total Overhead costs and divide with the Machine hours.

Overhead costs / Machine hours = 232,000/ 450= 515.56

Then we need to find the Overhead cost per unit for both the Models.

For that we need to multiply the actual activity drivers with the Departmental OH Rate. Then we need to add the total

Model 145	Activity Driver (a)	Departmental OH Rate (b)	Total Overhead Cost (a) x (b)
Components	1,800	167.33	301,200.00
Finishing	800	155.10	124,080
Support	300	515.56	154,666.67
Total OverheadCost			579,946.67

Model 212	Activity Driver (a)	Departmental OH Rate (b)	Total Overhead Cost (a) x (b)
Components	4,200	167.33	702,800.00
Finishing	2,200	155.10	341,220
Support	150	515.56	77,333.33
Total OverheadCost			1,121,353.33

Then we need to divide the  Total Overhead Cost with the Units Produced.

Model 145:

Overhead cost per unit = 579,946.67 / 1500 = 386.63

Model 212:

Overhead cost per unit = 1,121,353.33 / 3500 = 320.39

b.

Here we need to determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $250 for Model 145 and $180 for Model 212.

For that we need to add the Materials and Labor per unit and the Overhead per unit as below:

	Model 145	Model 212
Materials and Labor per unit (a)	$250.00	$180.00
Overhead per unit (b)	386.63	320.39
Total cost per unit (a) + (b)	636.63	500.39

c.

Here the market price for Model 145 is $820 and the market price for Model 212 is $480. We need to determine the profit or loss per unit for each model.

For that we need to deduct the total cost from the Price per unit provided as below:

	Model 145	Model 212
Price per unit (a)	$820.00	$480.00
Cost per unit (b)	636.63	500.39
Profit (loss) per unit (a) - (b)	$183.37	($20.39)