Question

Cost Assignment and JIT

Bunker Company produces two types of glucose monitors (basic and advanced). Both pass through two producing departments: Fabrication and Assembly. Bunker also has an Inspection Department that is responsible for testing monitors to ensure that they perform within prespecified tolerance ranges (a sampling procedure is used). Budgeted data for the three departments are as follows:

	Inspection	Fabrication	Assembly
Overhead	$160,000	$240,000	$68,000
Number of tests	—	10,000	30,000
Direct labor hours	—	24,000	12,000

In the Fabrication Department, the basic model requires 1.1 hour(s) of direct labor and the advanced model requires 2.2 hour(s). In the Assembly Department, the basic model requires 1.3 hour(s) of direct labor and the advanced model requires 2.45 hours. There are 15,000 basic units produced and 8,000 advanced units.

Immediately after preparing the budgeted data, a consultant suggests that two manufacturing cells be created: one for the manufacture of the basic model and the other for the manufacture of the advanced model. Raw materials would be delivered to each cell, and goods would be shipped immediately to customers upon completion. Workers within each cell would also be trained to perform monitor testing. The total direct overhead costs estimated for each cell would be $76,000 for the basic cell and $240,000 for the advanced cell.

Required:

1. Allocate the inspection costs to each department.

Fabrication	$
Assembly	$

Compute the overhead cost per unit for each monitor. Overhead rates use direct labor hours. Round your intermediate calculations and final answers to the nearest cent.

Basic	$ per unit
Advanced	$ per unit

2. Compute the overhead cost per unit if manufacturing cells are created. If required, round your intermediate calculations and final answers to the nearest cent.

Basic	$ per unit
Advanced	$ per unit

Which unit overhead cost do you think is more accurate—the one computed with a departmental structure, or the one computed using a cell structure?

Answer 1

1

Inspection overhead can be allocated based on number of tests

Allocation ratio=10000:30000=1:3

Allocation to fabrication=160000*1/4=40000

Allocation to assembly=160000*3/4=120000

Overhead cost per direct labor hours:

Fabrication

Assembly

Direct overhead costs

240000

68000

Allocated overhead costs

40000

120000

Total

280000

188000

Direct labor hours

24000

12000

Overhead cost per direct labor hours

11.67

15.67

In the Fabrication Department, the basic model requires 1.1 hour(s) of direct labor and the advanced model requires 2.2 hour(s). In the Assembly Department, the basic model requires 1.3 hour(s) of direct labor and the advanced model requires 2.45 hours

Unit cost:

$

Basic

(1.1*11.67)+(1.3*15.67)

33.21

Per unit

Advanced

(2.2*11.67)+(2.45*15.67)

64.07

Per unit

2

overhead cost per unit if manufacturing cells are created=total direct overhead costs estimated/units produced

$

Basic

76000/15000

5.07

Per unit

Advanced

240000/8000

30

Per unit

The one computed using a cell structure is more accurate since it has more direct costs that can be traced easility to each product