Question

Exercise 17-8 Using departmental overhead rates to assess prices LO P2 Way Cool produces two different models of air conditioners. The company produces the mechanical systems in their components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow. Process Activity Components Changeover Machining Setups Quantity 830 7,890 20 Finishing Welding Inspecting Rework Overhead Cost Driver $ 456,000 Number of batches 306,000 Machine hours 229,000 Number of setups $ 991,000 $ 186,000 Welding hours 223.000 Number of inspections 60,500 Rework orders $ 469,500 $ 147,000 Purchase orders 34,000 Number of units 70,000 Number of units $ 251,000 6,200 815 210 Support Purchasing Providing space Providing utilities 561 5,020 5,020 Additional production information concerning t radition follow

Answer 1

1.

Components department
Estimated overhead cost	$991,000	$125.60	per machine hour
Estimated machine hours	7,890
Finishing department
Estimated overhead cost	$469,500	$75.73	per welding hour
Estimated welding hours	6,200
Support department
Estimated overhead cost	$251,000	$447.42	per purchase order
Estimated purchase orders	561

Model 145	Activity driver	Departmental OH rate	Total overhead cost
Components	Machine hours	$125.60	$320,280
Finishing	Welding hours	$75.73	196,898
Support	Purchase orders	$447.42	167,335
			$684,513
Units produced			2,000
Overhead cost per unit			$342.26
Model 212	Activity driver	Departmental OH rate	Total overhead cost
Components	Machine hours	$125.60	$670,704
Finishing	Welding hours	75.73	272,628
Support	Purchase orders	447.42	83,668
Estimated total overhead cost			$1,027,000
Units produced			3,020
Cost per unit			$340.07

2.

	Model 145	Model 212
Material and labor per unit	$310	$130
Overhead cost per unit	342.26	340.07
Total cost per unit	$652.26	$470.07

3.

	Model 145	Model 212
Market price per unit	$2,075	$330
Cost per unit	652.26	470.07
Profit (loss) per unit	$1,422.74	-$140.07