Question

Please answer the 5 requirements and label each part clearly and accordingly. Start by filling in the blanks below

erhead resources: design, production Requirements prices, so CP's co alloca 1. Compute the manufacturing overhead allocated to each customer in 2017 using the simple costing system that uses machine-hours as the allocation ing the allocation base. machin d your an 2. Compute the manufacturing overhead allocated to each customer in 2017 using department-based manufacturing overhead rates 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 customerfs) will be unhappy? How would you respond to these concerns? How else might CP use the information available from its department-by-department analysis of manufacturing overhead costs? 5,00 3. g the 4. 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? CP's managers are wondering if they should further refine the 5. Done Print ere are three main departments that consume overhead resources: design, production, an y complained of being charged noncompetitive prices, so CP's cont imple costing system allocates variable manuf ng detailed information: Data Table overh erhea bas To Usage of Cost Drivers by Customer Swe Contract Manufacturing Eastern Caufield Island omer Department Cost Driver Overhead in 2017 Motors Motors Auto erhe Design CAD-design-hours 35,000 150 250 100 ocat Engineering Engineering-hours 25,000 130 100 270 220,000 1,000 3,700 300 Machine-hours Production 280,000 Total Done Print 40 Car Plant (CP) designs and produces automotive parts. In 2017, actual variable manufacturing overhead is $280,000 CP's simple costing system alocates variable manuacuing ovehead to tra based on machine-hours and prices its contracts based on full costs. One of ts customers has regulary complained of being charged noncompee prices so CPs cooer Doug Donhue examine the consumption of overhead resources more closely, He knows that there are three main departments that consume overhead resources design production, and engineeng vs with the depement personnel and examination of time records yield the following detailed information EEClick the icon to view the information.) Quston Hep enu Read the reauirements Requirement 1. Compute the manufacturing overhead allocated to each customer in 2017 using the simple costing system that uses machine-hous as the alocation be Determine the formula needed to caloulate overhead using the simple costing method and then calculate CPs manutacturing overhead nate for 2017.(Round your answer to the nea n Total machine hours Manufacturing overhead rate Total manufacturing overhead 56.00 per machine hour 5,000 280,000 S Calculate the overhead allocated to each customer using the simple costing method. (Round your answers to the nearest whole dollar) Overhead Machine Allocated Hours Used Customer Eastem Motors Caufeld Motors Island Auto

Answer 1

1	Actual Variable OH	280000
	Total Machine Hrs	300+3700+1000
		5000
	Mach OH based on machine hrs	280000/5000 hrs
		56 per hr
	The following table shows the variable manufacturing OH allocated to each customer based on machine hrs
		Eastern Motors	Caufield Motors	Island Auto
	Mach Hrs-A	300	3700	1000
	Mach hr rate per hr	56	56	56
	OH allocated	16800	207200	56000
2	Calculation of the departmental based manufacturing OH rate.
	Department	Cost Driver	Manufacturing OH	Total Cost Driver Units	Rate
	Design	CAD design Hrs	35000	150+250+100	70
	Production	Machine Hrs	220000	300+3700+1000	44
	Engineering	Engineering Hrs	25000	130+100+270	50
			280000
	The following shows the allocation to each customer based on the departmental based manufacturing OH
		Eastern Motors	Caufield Motors	Island Auto
	Design-CADdesignhrs*OH rate	150*70=10500	250*70=17500	100*70=7000
	Production -Mach hrs*OH rate	300*44=13200	3700*44=162800	1000*44=44000
	Engineering-Eng Hrs*OH Rate	130*50=6500	100*50=5000	270*50=13500
		30200	185300	64500
3	The table shows the ratio of costs in both departments
		Eastern Motors	Caufield Motors	Island Auto
	Depratmental Rate-2	30200	185300	64500
	Machine Hr Rate-OH allocated-1	16800	207200	56000
	ratio(2/1)	1.80	0.89	1.15
	It depicts that with departmental rate increased in case of eastern motors and island auto while decreased in case of Caufiled Motors
	The table shows the percentage of cost drivers by each customer
		Eastern Motors	Caufield Motors	Island Auto	Cost Driver
	Design	30	50	20	CAD design Hrs
	Engineering	26	20	54	Engineering Hrs
	Production	6	74	20	Mach Hrs
	It is seen that EM consumed 26% of engineering hrs,6% of machine hrs and 30% of CAD design hrs in the yr.The use
	of machine hrs for OH allocation caused the underestimation of the cost of resources used by Emotors.
	Due to this there is a increase in the cost of E Motors when the departmental rate is used.Similarly that C Motors
	have been charged at non competitive prices due to higer use of machine hrs while less use engineering and CAD
	design hrs.To this concern the use of resources and associated cost can be shown to both customers Emotors and Iauto
	are using higher engineering hrs which is causing the cost to increase.
4	Apart from pricing to customers CP uses this information to evaluate its own operational efficiency and should streamline
	its operations to reduce the overall costs and increase the value of the indirect resources.
	It can also set to the use of indirect resources and its unit cost which would be effective to mitigate the target based cost
	management and thus perform the departmental cost analysis effectively.
5	Further refining of the department by department costing system into ABC system will not be worthwhile based on the conditions depicted below:
	*The single production activity will consist of the larger volume of the cost of the department.
	*Same Cost Driver for each activities.