Question

From Tesla’s 2018 10-k:

Vehicle Production Numbers
Model 3	72,531
Model S/X	14,517
Total	87,048

Publicly disclosed vehicle production numbers from Tesla’s Q2 2019 were as follows:

From Tesla’s public disclosures we can see that overhead allocation is likely very important to them. That is, because they currently make three different models of cars in the same factory, and these different models share some component parts that are also manufactured by Tesla (electric motors and battery packs), there will be many common costs that are not able to be directly traced to each type of model.

We do not have information on exactly what overhead costs Tesla has or exactly how Tesla allocates overhead because these are not required financial disclosures. However, let’s make some assumptions about their overhead costs and cost drivers and see how using activity-based costing techniques to allocate overhead versus using a single overhead rate might affect their overhead allocations and ultimately their business decisions.    

Let’s assume Tesla has estimated their total manufacturing overhead costs for the year to be $2,665,000,000 based on the following schedule of expected overhead costs:

Estimated Annual Overhead Costs (all numbers in 000’s)
Depreciation – Tooling (used to make parts)	$220,000
Depreciation - Machinery	740,000
Shipping Costs (for parts used in making both cars)	260,000
Materials Handling Costs	140,000
Utilities (Electricity, water, etc.)	75,000
Depreciation (Fremont Factory)	90,000
Supervisor Salaries	500,000
Set-up Costs	180,000
Engineering Support	215,000
Quality Inspections	245,000
Estimated Total Annual Overhead	$2,665,000

Let’s also assume that Tesla tracks the following information for each model type that could be used as cost drivers. To simplify things let’s just focus on the Model 3 and the Model S.

Possible Cost Driver Information
	Amount for Model 3 in Q2 2019	Amount for Model S in Q2 2019	Estimated Total Annual Amount
Number of units	72,531	9,541	330,000
Direct labor hours	1,589,000	437,529	8,100,000
Number of machine hours	789,321	124,561	2,855,000
Factory square footage*	6,000,000	3,500,000	9,000,000
Number of setups	145,062	57,185	810,000
Number of inspections	6,236,754	1,689,533	31,750,000
Number of unique parts per vehicle*	8,000	9,000	8,500
Number of shipments	1,800	950	11,000
Number of engineering support calls	61,870	19,200	325,000
Number of parts	580,248,000	85,869,000	2,665,500,000
Number of engineering support hours	185,610	86,400	1,090,000
Number of unique machines used*	200	185	250

* Unlike the other cost drivers listed these items do not increase over time which is why the estimated annual amounts are similar to the Q2 amounts

Required Case Questions (Parts A – F)

Part A: Using the previously provided information calculate the per unit overhead cost for Q2 2019 for Model 3 and Model S based on allocating manufacturing overhead in a normal costing system using machine hours as a single cost driver for manufacturing overhead.

Part B: Select what you believe is the best cost driver for each of the separate overhead costs listed above if Tesla were to use an activity-based costing system. Prepare a schedule that shows the cost driver that should be paired with each overhead cost. You can use a particular cost driver more than once if you believe it is the best cost driver for more than one overhead cost.

Part C: Using the costs drivers you selected for an activity-based costing system in part B above, calculate the per unit overhead cost for Q2 2019 for Model 3 and Model S based on allocating overhead in a normal costing system using an activity-based costing approach.

Part D: Assume that actual overhead for Q2 2019 is $800,000,000. Adjust your calculations under both Parts A and C to reflect the needed adjustment to actual overhead costs. Hint: the adjustment should be made based on the total allocated overhead to each model before adjustment.

Part E: Provide a brief description and analysis of the differences in the overhead costs per unit that you calculated in Parts A and C above (use the amounts after making the required adjustment in part D). This description and analysis should note the amount and direction of any differences in overhead costs across the two methods for each model and should be focused on the specific reasons for the majority of the difference between these two overhead allocation methods.

Part F: Name at least two business decisions that Tesla may make differently if they use an activity-based costing system rather than a single volume-based cost driver to allocate manufacturing overhead. Be sure to describe why these business decisions are likely to change with an activity-based costing system.

Answer 1

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