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 Duncan Everett 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:

Manufacturing Overhead in 2017 $ 35,000 25,000 220.000 Department Cost Driver Design CAD-design-hours Engineering Engineering-hours Production Machine-hours Usage of Cost Drivers by Customer Contract United Hamlet Motors Motors Leland Auto 150 250 130 100 270 300 3,700 1,000 100 280,000 Total

Requirement 1. Compute the manufacturing overhead allocated to each customer in 2017 using the simple costing system that uses​ machine-hours as the allocation base.

Determine the formula needed to calculate overhead using the simple costing method and then calculate CP​'s manufacturing overhead rate for 2017. (Round your answer to the nearest​cent.)

Calculate the overhead allocated to each customer using the simple costing method. ​(Round your answers to the nearest whole​ dollar.)

Requirement 2. Compute the manufacturing overhead allocated to each customer in 2017 using​ department-based manufacturing overhead rates. ​(Abbreviations used: Dept.​ = Department.)

Determine the formula used to calculate the​ department-based manufacturing overhead​ rates:

CP​'s 2017 manufacturing overhead rates by department are as​ follows:

Calculate the overhead allocated to each​ customer, by​ department, using the departmental manufacturing overhead rates calculated in the previous step. Calculate the total overhead cost for each department and each customer.

Requirement 3. Comment on your answers in requirements 1 and 2. Which customer do you think was complaining about being overcharged in the simple​ system? If the new​ department-based rates are used to price​ contracts, which​ customer(s) will be​ unhappy? How would you respond to these​ concerns? (Pick one of the options that are bold on each statement as one of those is supposed to be the answer.)

Under the​ simple-costing system, (Hamlet, Leland, United) was likely unhappy about their​ bill, because the contract appears to have been (Overcosted, undercosted). If the new​ department-based rates are used to price​ contracts, (Hamlet, Leland, United) will likely be happier about their bill.

If the new​ department-based rates are used to price​ contracts, (Hamlet and Leland, United and Hamlet, United and Leland) will likely be unhappy. This is because their bills under the​ simple-costing system appear to have been (overcosted, undercosted). Using the​ department-based rates, their bills will be (higher, lower).

If the new​ department-based rates are​ used, CP hould explain to the unhappy customers how the calculation was​ done, and point out their high use of (Design and Engineering Resources, Production Machine Hours) relative to (Design and Engineering Resources, Production Machine Hours).

Requirement 4. How else might CP use the information available from its​ department-by-department analysis of manufacturing overhead​ costs? ​(Select all that​ apply.)

Requirement 5. CP​'s managers are wondering if they should further refine the​ department-by-department costing system into an ABC system by identifying different activities within each department. Under what conditions would it not be worthwhile to further refine the department costing system into an ABC​ system?

Answer 1

Please find below table useful to compute desired results: -

A 250 130 B 1 Actual Manufacturing Overhead 280000 2 Usage of Cost Drivers by customer Contract 3 Department Cost Driver Manufacturing Overhead United Motors Hamlet Motors Leland Auto 4 Design CAD design hours 35000 150 100 5 Engineering Engineering hours 25000 100 270 6 Production Machine hours 220000 300 3700 1000 7 Total =SUM(C4:06) 8 9 Manufacturing overhead rate Actual Manufacturing Overhead Total Production Machine hours =B1/SUM(D6:F6| 11 Simple costing system 13 Cost Allocation 14 =D3 =D6*B10 15 =E3 =E6*B10 16 =F3 =F6*B10 10 12 19 20 Overhead Rate 21 Design 22 Engineering 23 Production 24 Department based manufacturing overhead allocated Cost Allocated to Customers =D3 =E3 =F3 =C4/SUM(D4:F4) =D4*$B$21 =E4*$B$21 =F4*$B$21 =C5/SUMD5:F5) =D5*$B$22 =E5*SBS22 =F5*SB$22 =C6/SUM(D6:F6) =D6*$B$23 =E6*$B$23 =F6*$B$23 =SUM(C21:C23) =SUMD21:D23) =SUM(E21:E23)

End results would be as follows: -

A 1 Actual Manufacturing Overhead 2 3 Department 4 Design 5 Engineering 6 Production 7 Total 8 9 Manufacturing overhead rate DE 280.000 Usage of Cost Drivers by customer Contract Cost Driver Manufacturing Overhead United Motors Hamlet Motors Leland Auto CAD design hours 35,000 150 250 100 Engineering hours 25,000 100 270 Machine hours | 220.000 300 3.700 1,000 280.000 130 Actual Manufacturing Overhead Total Production Machine hours 56 11 12 Simple costing system 13 Cost Allocation 14 United Motors 15 Hamlet Motors 16 Leland Auto 16.800 207,200 56,000 17 18 19 Department based manufacturing overhead allocated Cost Allocated to Customers United Motors Hamlet Motors Leland Auto | 10,500 17,500 7,000 6,500 5,000 13,500 13,200 162.800 44.000 30,200 185,300 64,500 20 Overhead Rate 21 Design 22 Engineering 23 Production 70 24

Under the simple-costing system, Hamlet was likely unhappy about their​ bill, because the contract appears to have been Over-costed. If the new department-based rates are used to price​contracts, Hamlet will likely be happier about their bill.

If the new department-based rates are used to price contracts, United and Leland will likely be unhappy. This is because their bills under the simple-costing system appear to have been under-costed. Using the department-based rates, their bills will be higher.

If the new​ department-based rates are​ used, CP should explain to the unhappy customers how the calculation was​ done, and point out their high use of Production Machine Hours relative to Design and Engineering Resources.

Req. 4	to set targets over time to reduce both the consumption of each indirect resource and the unit costs of the resources.
Req. 5	if significant costs are incurred on different activities within a department, but each activity has the same cost driver