Question

using excel document to answer the question:

Auerbach Enterprises manufactures air conditioners for automobiles and trucks manufactured throughout North America. The company designs its products with flexibility to accommodate many makes and models of automobiles and trucks. The company’s two main products are MaxiFlow and Alaska. MaxiFlow uses a few complex fabricated parts, but these have been found easy to assemble and test. On the other hand, Alaska uses many standard parts but has a complex assembly and testing process. MaxiFlow requires direct materials costs which total $135 per unit, while Alaska’s direct materials requirements total $110 per unit. Direct labor costs per unit are $75 for MaxiFlow and $95 for Alaska.

Auerbach Enterprises uses machine hours as the cost driver to assign overhead costs to the air conditioners. The company has used a company-wide predetermined overhead rate in past years, but the new controller, Bennie Leon, is considering the use of departmental overhead rates beginning with the next year.

The following planning information is available for the next year for each the four manufacturing departments within the company:

Overhead cost Machine Hours

Radiator parts fabrication $80,000 10,000   

Radiator assembly, weld, and test 100,000 20,000

Compressor parts fabrication 120,000 5,000   

Compressor assembly and test 180,000 45,000

Total. $480,000 80,000   

Normally, the air conditioners are produced in batch sizes of 20 at a time. A production batch of 20 units requires the following number of hours in each department:

MaxiFlow Alaska

Radiator parts fabrication. 28 16

Radiator assembly, weld, and test. 30 74

Compressor parts fabrication. 32 8

Compressor assembly and test. 26 66

Total 116 164

Required:

Compute the departmental overhead rates using machine hours as the cost driver.

Compute a company-wide overhead rate using machine hours as the cost driver.

Compute the overhead costs per batch of MaxiFlow and Alaska assuming:

(a) The company-wide rate.

(b) The departmental rates.

Compute the total costs per unit of MaxiFlow and Alaska assuming:

(a) The company-wide rate.

(b) The departmental rates.

Is one product affected more than the other by use of departmental rates rather than a company-wide

rate? Why or why not?   

Answer 1

A)	DEPARTMENTAL OVERHEAD RATES
				(I)	(II)	RATE PER HOUR ($)
				Overhead cost ($)	Machine Hours	(I)/(II)
	Radiator parts fabrication			80,000	10,000	8
	Radiator assembly, weld, and test			100,000	20,000	5
	Compressor parts fabrication			120,000	5,000	24
	Compressor assembly and test			180,000	45,000	4
				480,000	80000
B)	COMPANY WIDE OVERHEAD RATE = $ 4,80,000 / 80,000 HOURS
			=	$ 6 PER HOUR

OVERHEAD COST PER BATCH
B) USING DEPARTMENTAL RATE
i)	For MaxiFlow
				(I)	(II)	(I) × (II)
				Hours	RATE PER HOUR ($)	$ Overhead cost per batch
	Radiator parts fabrication			28	8	224
	Radiator assembly, weld, and test			30	5	150
	Compressor parts fabrication			32	24	768
	Compressor assembly and test			26	4	104
						1246
ii)	For Alaska
				(I)	(II)	(I) × (II)
				Hours	RATE PER HOUR ($)	$ Overhead cost per batch
	Radiator parts fabrication			16	8	128
	Radiator assembly, weld, and test			74	5	370
	Compressor parts fabrication			8	24	192
	Compressor assembly and test			66	4	264
						954
	total costs per unit
					MaxiFlow ($)	Alaska ($)
	A) USING COMPANY WIDE RATE
	Material cost				135	110
	Labor Cost				75	95
	Overhead Cost				34.80 (696/20)	49.2 (984/20)
	total costs per unit				244.8	254.2
	B) USING DEPARTMENTAL RATE
	Material cost				135	110
	Labor Cost				75	95
	Overhead Cost				62.30 (1246/20)	47.70 (954/20)
	total costs per unit				272.30	252.7

Yes Maxiflow is affected more in terms of total cost per unit if departmel rates are used because it takes more hours.