Question

Car Plant (CP) designs and produces automotive parts. In 2017, actual manufacturing overhead is $280,000 CP's simple costing system allocates manufacturing overhead to its three customers based on machine hours and prices its contracts based on full costs. One of its customers has regularly complained of being charged noncompetitive prices, so CP's controller Dixon Johnson 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 record yield the following detailed information in the chart.

0 Data Table each ble cos Department Cost Driver Design CAD-design-hours Engineering Engineering-hours Production Machine-hours Manufacturing Overhead in 2017 $ 35,000 25,000 220,000 Usage of Cost Drivers by Customer Contract Northern Caufield Mystiland Motors Motors Auto 150 250 100 130 100 270 300 3,700 1,000 280,000 Total Print Done 5. department-by-department analysis of manufacturing overhead costs? CP's managers are wondering if they should further refine the department-by-department costing system into an ABC system by lder what conditions

Answer 1

Requirement -1
	Total manufacturing overhead	$280,000
	Total machine hours	5,000
	Overhead per machine hour	$56	(280,000/5000)
		Northern Motors	Caufield Motors	Mystiland Auto
	Machine Hours	300	3700	1000	5,000
	Manufacturing overhead allocated	$16,800	$207,200	$56,000	$280,000
		(56*300)	(56*3700)	(56*1000)
Requirement -2
	Manufacturing overhead allocated
	Ratio	Northern Motors	Caufield Motors	Mystiland Auto	Total
Design	150 : 250 : 100	$10,500	$17,500	$7,000	$35,000
Engineering	130 : 100 : 270	$6,500	$5,000	$13,500	$25,000
Production	300 : 3700 : 1000	$13,200	$162,800	$44,000	$220,000
	Manufacturing overhead allocated	$30,200	$185,300	$64,500	$280,000
Requirement -3
	Caufield motors must be complaining to the company regarding high prices under simple system.
	If new department - based rates are used then Northern motors and mystiland auto will be unhappy.
	Company can address these concerns by providing quality services as compared to it's competitors.
Requirement-4	Uses of department wise costing analysis.
	i) in doing minimum pricing.
	ii) taking make or buy decisions
	iii) Analyzing customer profitability more accurately.
	iv) Identifying non value adding activities and eliminating the same.
Requirement -5	Under ABC system each activities are identified and analyzed properly and hence, it is a very costly process.
	And if company decides to refine it's system to a great level then gradually cost of implementing such things keeps on increasing.
	If cost incurred in implementing ABC system in the company exceeds the benefit to be received then it is not worthwhile to further refine.