In: Accounting
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 |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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.