Question

In: Accounting

Plant-wide, department, and ABC indirect cost rates. Automotive Products (AP) designs and produces automotive parts. In...

Plant-wide, department, and ABC indirect cost rates. Automotive Products (AP) designs and produces automotive parts. In 2014, 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 it customers has regularly complained of being charged noncompetitive prices, so AP's controller Devon 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

Usage of Cost Drivers by Customer Contract
Manufacturing United Holden Leland
Department Cost Driver Overhead in 2014 Motors Motors Auto
Design CAD-design-hours $             39,000 110 200 80
Production Engineering-hours $             29,600 70 60 240
Engineering Machine-hours               240,000 120 2,800 1,080
Total               308,600
Round answers to two decimal points.
Enter amount Compute the manufacturing overhead allocated to each customer in 2014:
______________ 1) a) using the simple costing system that uses machine-hours as the allocation base.
2) b) using department-based manufacturing overhead rates:
______________ I) Design
______________ ii) Production
______________ iii) Engineering
______________ 3) Which customer do you think was complaining about being overcharged in the simple system?
A) United Motors
B) Holden Motors
C) Leland Auto

Solutions

Expert Solution

1) a) If machine hour is used as a base for allocating manufacturing overhead to each customer, then a single overhead rate need to be calculated.

Single Overhead rate = Total Manufacturing overhead/Total Machine Hours

Total Machine Hours = 120 hrs+2,800 hrs+1,080 hrs = 4,000 hrs

Single Overhead rate = $308,600/4,000 hrs = $77.15 per hour

Manufacturing overhead allocation (Amount in $)

Particulars United Motors Holden Motors Leland Auto Total
1) Machine Hours 120 2,800 1,080 4,000
2) Single Overhead Rate 77.15 77.15 77.15 77.15
3) Allocated Manufacturing Overhead (1*2) 9,258 216,020 83,322 308,600

2) b) Firstly we need to calculate manufacturing overhead rate based on each department which is shown as follows:- (Amount in $)

Department Cost driver Manufacturing overhead (A) Total Cost driver usage (B) Overhead Rate (A/B)
Design CAD design hours 39,000 (110+200+80) = 390 $100 per design hr
Production Engineering hours 29,600 (70+60+240) = 370 $80 per engineering hr
Engineering Machine Hours 240,000 (120+2,800+1,080) = 4,000 $60 per machine hr

Manufacturing overhead allocation (Amount in $)

Particulars United Motors Holden Motors Leland Auto Total
Design (110*$100) = 11,000 (200*$100) = 20,000 (80*$100) = 8,000 39,000
Production (70*$80) = 5,600 (60*$80) = 4,800 (240*$80) = 19,200 29,600
Engineering (120*$60) = 7,200 (2,800*$60) = 168,000 (1,080*$60) = 64,800 240,000
Total 23,800 192,800 92,000 308,600

3) Holden motors was overcharged at $216,020 in the simple system as against the allocated overhead of $192,800 whereas all other two customers are under charged in simple system. Therefore, Holden Motors would be complaining about being overcharged in the simple system.


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