Auerbach Enterprises manufactures air conditioners for automobiles and trucks ma

Question

Auerbach Enterprises manufactures air conditioners for automobiles and trucks manufactured throughout North America. The company designs its products with flexibility to accommodate many makes and models of automobiles and trucks. The company%u2019s two main products are MaxiFlow and Alaska. MaxiFlow uses a few complex fabricated parts, but these have been found easy to assemble and test. On the other hand, Alaska uses many standard parts but has a complex assembly and testing process. MaxiFlow requires direct materials costs which total $135 per unit, while Alaska%u2019s direct materials requirements total $110 per unit. Direct labor costs per unit are $75 for MaxiFlow and $95 for Alaska.

Auerbach Enterprises uses machine hours as the cost driver to assign overhead costs to the air conditioners. The company has used a company-wide predetermined overhead rate in past years, but the new controller, Bennie Leon, is considering the use of departmental overhead rates beginning with the next year.

The following planning information is available for the next year for each the four manufacturing departments within the company:

Overhead Machine

Costs Hours

Radiator parts fabrication.............. $ 80,000 10,000

Radiator assembly, weld, and test.... 100,000 20,000

Compressor parts fabrication.......... 120,000 5,000

Compressor assembly and test........ 180,000 45,000

Total $480,000 80,000

Normally, the air conditioners are produced in batch sizes of 20 at a time. A production batch of 20 units requires the following number of hours in each department:

MaxiFlow Alaska

Radiator parts fabrication........... 28 16

Radiator assembly, weld, and test....... 30 74

Compressor parts fabrication......... 32 8

Compressor assembly and test......... 26 66

Total 116 164

Questions: Please tell me how you got the answer in addition to providing the answer. Thanks.

1. Compute the departmental overhead rates using machine hours as the cost driver.

2. Compute a company-wide overhead rate using machine hours as the cost driver.

3. Compute the overhead costs per batch of MaxiFlow and Alaska assuming:

(a) The company-wide rate.

(b) The departmental rates.

4. Compute the total costs per unit of MaxiFlow and Alaska assuming:

(a) The company-wide rate.

(b) The departmental rates.

5. Is one product affected more than the other by use of departmental rates rather than a company-wide rate? Why or why not?

Explanation / Answer

Radiator Parts Fabrication = Overhead Costs / Machine Hours $80,000 = $8 per machine hour 10,000 Radiator Assembly, Weld, and Test = $100,000 = $5 per machine hour 20,000 Compressor Parts Fabrication = $120,000 = $24 per machine hour 5,000 Compressor Assembly and Test = $180,000 = $4 per machine hour 45,000 =========================================================================================================================================================================================== As far as the department overhead rates are concerned, the compressor assembly and test department has the highest overhead costs with the most machine hours that totals $4 per machine hour. =========================================================================================================================================================================================== The compressor parts fabrication department yields the highest cost per machine hour at $24. The next feasible objective for the company is to determine the company-wide overhead rate using machine hours as the cost driver. =========================================================================================================================================================================================== Company-Wide: Overhead Rate = Forecast Overhead / Expected Machine Hours Overhead Rate = $480,000 = $6 per machine hour 80,000 =========================================================================================================================================================================================== Company-Wide Rate: Direct Material Costs x Batch Size + Direct Labor Costs x Batch Size Maxiflow: Alaska: 135 x 20 = 2700 110 x 20 = 2200 75 x 20 = 1500 95 x 20 = 1900 = $4200 per batch = $4100 per batch Departmental Rate: =========================================================================================================================================================================================== Direct Materials Costs + Direct Labor Costs / Each Department Hour Maxiflow: 135 + 75 = $210 Radiator Parts Fabrication: 210 / 28 = $7.50 per batch Radiator Assembly, Weld, and Test = 210 / 30 = $7 per batch =========================================================================================================================================================================================== Compressor Parts Fabrication: 210 / 32 = $6.60 per batch Compressor Assembly and Test: 210 / 26 = $8.10 per batch Alaska: 110 + 95 = 205 Radiator Parts Fabrication: 205 / 16 = $12.80 per batch Radiator Assembly, Weld, and Test: 205 / 74 = $2.70 per batch Compressor Parts Fabrication: 205 / 8 = $25.60 per batch Compressor Assembly and Test: 205 / 66 = $3.10 per batch ============================================================ There was only a $100 difference between Maxiflow and Alaska when it came to company-wide rates per batch. the On other hand, the departmental rates between Maxiflow and Alaska were significantly different. Maxiflow had the cheaper departmental costs per batch with an average of $7.30 per batch compared to $11.05 per batch with Alaska. to determine the companywide and departmental costs per unit of Maxiflow and Alaska. Company-Wide Rate: Total Cost per Unit = Direct material Costs + Direct Labor Costs / Number of Units Maxiflow: =========================================================================================================================================================================================== Direct Materials = Alaska: 135 Direct Labor Costs = 75 210 $415 + $480,000 / 40 = $12,010.38 per unit 110 + 95 = 205 210 + 205 = $415 Departmental Rate: Radiator Parts Fabrication: $80,000 + $415 / 40 = $2010.38 per unit Radiator Assembly, Weld, and Test: $100,000 + 415 / 40 = $2510.38 =========================================================================================================================================================================================== Compressor Parts Fabrication: $120,000 + 415 / 40 = $3010.38 Compressor Assembly and Test: $180,000 + 415 / 40 = $4510.38 =========================================================================================================================================================================================== So, it seems that the total costs per unit for the company-wide rate is slightly less per unit. The company-wide rate for total cost per unit is $12,010.38, while the total cost per unit for each department is $12, 041.52. ============================================================================================================================================================================================ The reduction of overhead expenses is one of the few areas of corporate cost control that receives little or no attention from management. Yet, the resulting savings and profit improvement can be startling After taking a look at all of the calculations for Auerbach, both company-wide and departmental, I think management would be better suited to continue using company-wide rates. The perception by managers of the relative importance of costs may be determined by the nature

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