Question

ATES. Better Yet Dishware aditional retail out- corating the dishes is e costs of making CASE 6.2 PLANT-WIDE VS. DEPARTMENTAL OVERHEAD RATES. Better yet produces dishes and drinking mugs for a large domestic market. It uses both traditional rota lets and its own company stores where slightly flawed product is sold. Decorating the done by hand, while the entire production process for drinking mugs is automated. John Kluny, president of Better Yet, has recently been concerned with the costs of dishware vs. coffee mugs. The cost of the products used to be roughly comparable until the bu mug-making machine was put in place last year. The mug-making machine cost the com $2,500,000 and is supposed to last five years with two shift-a-day operations. Other costs caused by running the machine add up to $250,000 per year, including the space, power, and insurance it requires. Only one direct labor worker is needed to run the machine. In the past, it took 15 people to make the mugs. Dishware is a larger department, but it only uses machines to form the dishes This machine is old and fully depreciated. The rest of the cost in the department is related to labor. More than 50 people work in the dishware department, hand-painting each set as it comes down the production line. The following table summarizes the material, labor and overhead costs, and activity drivers for the two departments before and after the new machine was put in place. Box of 8 Mugs Better Yet Dishware Before Purchasing the New Machine After Purchasing the New Machine 4 Place Serving Box of 8 Mugs 4 Place Serving Set of Dishware Set of Dishware Materials $30,000,000 $10,800,000 Materials $30,000,000 Labor ($6 per Hour) $1,500,000 $450,000 Labor ($15 per Hour) $1,500,000 Overhead (600% Labor) $9,000,000 $2,700,000 Overhead Total Cost $40,500,000 $13,950,000 Total Cost Divided by quantity made 2,500,000 1,200,000 Divided by quantity made 2,500,000 Cost per Unit Sale $16.20 $11.63 Cost per Unit Sale $10,800,000 $60,000 1,200,000 Lirivers per Wear Labor Dollars Machine Hours $1,500,000 4,000 $450,000 2.000 Drivers per year Labor Dollars Machine Hours $1,500,000 4,000 $60,000 6,000

Answer 1

	Better Yet Dishware
	a)
	Particulars	4 Place serving set of Dishware	Box of 8 Mugs	Total
	Existing Overheads	9,000,000.00	2,700,000.00	11,700,000.00
	Increase in costs of overheads (gone up by the cost of machine)			2,500,000.00
	Total revised overhead cost			14,200,000.00
	Note: It is assumed that cost of running the machine $ 250,000 per year is included in the total revised overhead cost, and is not in addition to the costs above.
	b)
	Particulars	4 Place serving set of Dishware	Box of 8 Mugs	Total
1	Earlier Labour Cost	1,500,000.00	450,000.00	1,950,000.00
2	Rate/hour	$15	$15
3	Total Labour hours	100,000.00	30,000.00
4	Total Labour Cost (Revised)	1,500,000.00	60,000.00	1,560,000.00
5	Rate/hour (Revised)	$15	$15
6	Labour Hours Used (4/5)	100,000.00	4,000.00	104,000.00
7	Total Overheads			14,200,000.00
8	Allocation based on Labour Cost = Total Overheads/Total labour cost * Departmental labour cost	13,653,846.15	546,153.85	14,200,000.00
9	Material Costs	30,000,000.00	10,800,000.00	40,800,000.00
10	Labor	1,500,000.00	60,000.00
11	Total Cost (8+9+10)	45,153,846.15	11,406,153.85
12	No. of units produced	2,500,000.00	1,200,000.00
13	Cost per unit sale (11/12)	18.06	9.51
	c)
	Particulars	4 Place serving set of Dishware	Box of 8 Mugs	Total
1	Total Overheads			14,200,000.00
2	Existing Overheads charged to Dishware department	9,000,000.00		9,000,000.00
3	Balance to be charged to Mug		5,200,000.00	5,200,000.00
4	Overhead cost allocation	9,000,000.00	5,200,000.00	14,200,000.00
5	Labour Cost	1,500,000.00	60,000.00	1,560,000.00
6	Labour Hours @ $15/hr	100,000.00	4,000.00
7	Overhead Rate - Using Labor rate	$ 90/ Labour Hour	$ 1300/Labour Hour
8	Machine Hours	4,000.00	6,000.00
9	Overhead Rate - Using Machine Hour	$ 2250/Machine Hour	$ 866.67/Machine Hour
	Therefore, Overhead Rates are -
	For Dishware department - $ 90 / Labor Hour
	For Mug Department - $ 866.67 / Machine Hour
	d) New product cost are as follows: - As caculated in b) above.
	Dishware	18.06
	Mugs	9.51
	Two distinct overhead allocation methods for two different departments is a better idea. Because, Dishware department is still labor intensive and mug making department has become machine intensive after bringing in new machine. Therefore, new approach would be better for allocation of overheads.
	e) After purchasing new machine effects on costs and total costs:
	Particulars	4 Place serving set of Dishware	Box of 8 Mugs	Total
1	No. of units produced	2,500,000.00	1,200,000.00
2	Old cost per unit	16.20	11.63
3	New Cost per unit	18.06	9.51
4	Savings / (increase) in cost p.u.	(1.86)	2.12
5	Savings / (increase) in Total	(4,653,846.15)	2,549,846.15	(2,104,000.00)
	Therefore, after implementation of new machine although cost per unit of Mug has come down from 11.63 to 9.51, but overall cost of company of making all products has increased by 2,104,000. Therefore, decision of buying new machine has gone wrong.