Question

Wheeler Place (WP) designs and produces automotive parts. In 2017, actual manufacturing overhead is $307,800. WP's simple costing system allocates manufacturing overhead to its three customers based on machine-hours and prices its contracts based on full costs. One of its customers has regularly complained of being charged noncompetitive prices, so WP's controller Deon Hunter realizes that it is time to examine the consumption of overhead resources more closely. He knows that there are three main departments that consume overhead resources: design, production, and engineering Interviews with the department personnel and examination of time records yield the following detailed information: (Click the icon to view the information) Read the requirements Requirement 1. Compute the manufacturing overhead allocated to each customer in 2017 using the simple costing system that uses machine-hours as the allocation base. Determine the formula needed to calculate overhead using the simple costing method and then calculate WP's manufacturing overhead rate for 2017. (Round your answer to the nearest cent) Total manufacturing overhead Total machine hours - Manufacturing overhead rate 307,800 3.800 81.00 per machine hour Calculate the overhead allocated to each customer using the simple costing method. (Round your answers to the nearest whole dollar.) Machine Overhead

Answer 1

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Solution: Actual plant wide matkine hoors manufacturing overhead rate based on $307800 + 3800 machine hours = 881 per machine hour. * Allocation of overhead costs : United Motors Aegean Motors particolars Manufacturing overhead, allocated based on machine Hours L 150 x 481 ] [ assox $21] [110o* $81 Island Auto 989100 $ 12,150 $ 206550 Mfg-overhead Total Rate Department in 2017 Driver units $ 39000 Design Engineering $ 33200 $235600 375 332 3800 $ 104 per CAD design hour $ 100 per engineering hour $62 per machine hour production particolars * Allocation of overhead COST : chited Aegean Island Total Motors rotors Auto Design related overhead, allocated on CAD $9880920280 8840 $39000 design hours (95x8 104), (195x604), (35x104) to Engineering related overhead allocated $ 6500 $5000 $ 21700 $33200 on engineering hours (65x700) (50xroc), (2171100) production related overhead, allocated $9300 9 152000 $68200 $235 on machine stours (150+ $62), (2550x862), (600x862) Total $25680 I 183380 198740 4307800 600

particolars united Motors Aegean Motors Island Auto $25680 $ 183380 $98440 a. Department rates (Requirement a bo plant wide rate (Requisrement ! Ratio of (a) (b) & lanso $206550 $89100 2011 0.89 loll The manufacturing overhead allocated to united motors increases by 80% under the department rates, the overhead allocated to Aegean motors decreases by about 114 and the overhead allocated to Island Auto increases by about 15t... The three contracts resources of the differ three sizably in the way they use the departments. units in each department * The osed percentage by the of total companies driver is a Cost Driver United Island Auto Department Motors Aegean Motors 3at. CAD designhoors 23.1. 199. Design Engineering prodoction engineering hours Machine hours 654 29-1- 671 * The United motors contract oss only 41. of total machines hours in 2017, yer uses of 25t. of CAD design hours and 20t. of engineering hours. The result is that the plant wide rate, based on machine hours, will greatly inderestimate the cost of resources wed on the United motors contract This explains the for increase in indirect coste assigned to the United motors contract when department rates are used. .

than The Island engineering Auto also hours and exel for is also fewer machine - hours ondercested. In contract, the Aegean motors uses less of design sa to and engineering is than of machine hours 1674-). Hence, the use of department rates will report lower indirect costs for Aegean motors than does a plant wide vate. Aegean Motors was probably complaining under the use of the Simple System because its contract was being relative to its consumption of Molt resources United is Istand on the other hand were having their contracts undercosted y underpriced by the simple system Assuming that Roadster company (RC) is an efficient and competitive Supplier, if the new -department based rates are used to price contracts, United & Island will be unhappy. RC should explain to United and Island how the calculation was done, and point out onited's high use of design i engineering resources and Island's high one of engineering resources relative to production machine hours. Ro's management should discuss ways of reducing the consumption of those resources, it possible, and show willingness to partner with them to do so. If the price is going to be steep, perhaps offer to Phase in the new prices.

(4). Other than pricing, RC can also use the information from the department based system to examine and Streamline its own production operations so that there is maximum value added from all indirect resources. It might set targets a time to reduce both the consumption of each indirect vese and the whit costs of the resources. The department bo System gives RC more opportunities for targeted cost management. 5. It would not be worth white to further retine the cost System into an ABC System it is a single activity accounts for a sizable proportion of the department's costs cor) (2) Significant costs are incurred on different activities within a department, but each activity has the same cost driver or (3) there wasn't much variation among contracts in the consumption of activities within a department. If, for example, most activities within department (design) were, in fact driven by CAD design hoors, then the more refined System would be more costly and no more accurate than the department based cost system. Even if there was sofficient variation, considering the relative sizes of the three department cost pools, it may only be cost-effective to forther analyze the production cost pool, which consumes 77% (e $235600 4307800) of the manufacturing overhead.