Question

Exercise 4-8 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 Driver Number of batches Machine hours Number of setups Quantity 870 8.330 180 Pinishing Welding Inspecting Rework Overhead Cost $ 470,000 312.000 228,000 $1,010,000 $ 182,000 229,000 63,500 $ 474,500 $ 139,000 34,000 67,000 $ 240,000 Welding hours Number of inspections Rework orders 5,700 910 130 Support Purchasing Providing space Providing utilities Purchase orders Number of units Number of units 465 5,320 5.320 Additional production information concerning its two product lines follows. Model 145 2,200 Model 212 3.120 4.100 Units produced Welding hours Batches Number of inspections Machine hours Setups Rework orders Purchase orders 435 510 3,050 400 5.280 50 310 155

Answer 1

1) Components department Overhead costs # of Machine hours Overhead rate per machine hour $1,010,000 8,330 [3050 + 5280] $121.25 ($1010000 / 8330 hours) Finishing department Overhead costs # of Welding hours Overhead rate per welding hour $474,500 5,700 [1600 + 4100] $83.25 [$474500 / 5700 hours] Support department Overhead costs # of Purchase orders Overhead rate per Purch. Order $240,000 465 [310 + 155] $516.13 ($240000 / 465 orders] Model 145 Activity Driver Dept. OHR Total OH Cost Components Machine hours $121.25 $369,812.50 [3050 hours x $121.25) Finishing Welding hours $83.25 $133,200.00 [1600 hours x $83.25.00] Support Purchase orders $516.13 $160,000.30 [310 orders x $516.130] Total overhead costs allocated to Model 145 $663,012.80

Model 212 Activity Driver Dept. OHR Total OH Cost Components Machine hours $121.25 $640,200.00 (5280 hours x $121.25] Finishing Welding hours $83.25 $341,325.00 [4100 hours x $83.25.00] Support Purchase orders $516.13 $80,000.15 [155 orders x $516.130] Total overhead costs allocated to Model 212 $1,061,525.15 2) Unit Direct material & labor cost Overhead cost per unit Total cost per unit Model 145 $200.00 $301.37 $501.37 Model 212 $190.00 $340.23 $530.23 [Given] [$663012.80 / 2200 units; $1061525.15 / 3120 units] 3) Market price per unit Total cost per unit Profit or loss) per unit Model 145 $1,550.00 $501.37 $1,048.63 Model 212 $310.00 $530.23 ($220.23) --> (a) --> (b) (Ref: Requirement-2] --> (a) - (b)