Hurst Mats manufactures custom replacement floor mats for automobiles. The floor

Question

Hurst Mats manufactures custom replacement floor mats for automobiles. The floor mats are made of spun nylon on highly automated, expensive machinery. Hurst manufactures two mat styles: Plush and Deluxe. Hurst's unionized work force makes it difficult for Hurst to compete on price. So far it has been able to successfully compete on quality, innovative design, and delivery schedule. However, the leaders of Hurst's union are aggressive and are seeking additional work-related job guarantees. Hurst management would like to reduce its dependence on unionized labor.
Hurst's manufacturing process is overhead-driven; most of the overhead arises from the common machinery that produces the Plush and Deluxe floor mats. Non-unionized engineers and technicians maintain the equipment. Expensive lubricants and filters are required to operate the machines, which require large amounts of electricity and natural gas. Each mat style is produced in batches that consist of 10 mats per batch. Plush and Deluxe do not put differential demands on the equipment other than through the amount of machine time required to produce each batch of mats. The following table summarizes the operating data for each mat style:

Overhead is allocated to the two mat styles using a predetermined overhead rate estimated from a flexible budget at the beginning of the year. Fixed overhead is estimated to be $680,000, and variable overhead is estimated to be $ 1.50 per machine minute. Management is debating whether to use machine minutes or direct labor cost as the overhead allocation base to allocate overhead to the two mat styles.

Required:
a. Calculate two overhead rates. The first uses machine minutes as the allocation base, and the second overhead rate uses direct labor cost as the allocation base. Round both overhead rates to two decimals.

b. Calculate the total product cost per batch of Plush and Deluxe mats using the two overhead rates calculated in (a).

c. Discuss the advantages and disadvantages of using machine minutes or direct labor cost as the allocation base for assigning overhead to the two mat styles.

Explanation / Answer

a) Overhead rates for 1 Plush mats using machine minutes as the allocation base Total no of products for 14000 batches = 14000*10 = 140000mats Machine minutes per batch of 10 mats = 12 min Therefore, Machine minutes for 14000 batches = 12/10*14000 = 16800 fixed overhead = $680,000 Variable overhead = $1.5/ machine minute = 1.5*16800 = 25200 Total overhead = 680000+25200 = 705200 Overhead rates = 705200/16800 = 41.976 answer Overhead rates for 1 Deluxes mats using machine minutes as the allocation base Total no of products for 9000 batches = 9000*10 = 90000mats Direct labour per batch of 10 mats = 4 Therefore, direct laboour costs for 90000 mats = 4/10*90000 = 36000 fixed overhead = $680,000 variable overhead = $1.5/ direct labour costs = 1.5*36000 = 54000 Total overhead = 680000+54000 = 734000 Overhead rates = 734000/36000 = 20.38 answer (b) Product costs for a batch of Plush Direct labor per batch of 10 mats $4 Direct material per batch of mats $7 Overhead = 503.71 Total costs = 514.712 Product costs for a batch of deluxe Direct labor per batch of 10 mats $6 Direct material per batch of mats $5 Overhead = 122.28 Total costs = 133.28 answer c) Using machine time as allocation base seems to be appropriate for both the mats as Expensive lubricants and filters are required to operate the machines, which require large amounts of electricity and natural gas. Plush and Deluxe do not put differential demands on the equipment other than through the amount of machine time required to produce each batch of mats. They do not have any difference except the time required to complete the product on the machine Using direct labour costs may not be right here as allocation of overhead will go haywire as both require products to using the same amount of labour Happy to help

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