Frames, Inc. manufactures two types of metal frames, large and small. Steel angle iron is first cut to the appropriate sizes and the pieces are then welded together to form the frames. The process involves a high degree of automation. Considerable indirect labor by skilled technicians and engineers is required to maintain the automated equipment.

There are two manufacturing departments, Cutting and Welding. The following reports detail the actual costs of production for the year:

a. Compute the unit costs of large frames and small frames for the year using a single, factory-wide overhead rate. The factory-wide overhead allocation base is direct labor cost.

b. Compute the unit costs of large frames and small frames for the year using different overhead rates for utilities, indirect labor, and general factory costs.
Utility costs and indirect labor costs are allocated to frames using kilowatt hours.
General factory costs are allocated to frames using direct costs (the sum of direct labor and direct materials).

c. Compute the unit costs of large frames and small frames for the year using departmental overhead rates for the Cutting and Welding Departments. General factory overhead costs are evenly divided between the two departments before departmental overhead is allocated to the frames. Cutting Department overhead costs are allocated based on the amount of direct materials costs. Welding Department overhead costs are allocated based on kilowatt hours in the Welding Department.

d. Analyze why different unit costs result from the different methods of allocating overhead costs to the products. Which method is best?

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Frames, Inc. Year Ending December 31 Direct Costs Frame Type Units Produced Large 10,000 Small 30,000 Direct Labor Direct Materials $ 480,000 1,140,000 $950,000 800,000 Overhead Costs by Department Overhead Costs Utilities Cutting $ 58,000 Indirect labor 430,000 General factory costs Total overhead costs Welding Total $174,000 $ 232,000 480,000 910,000 150,000 $1,292,000 Kilowatt Hours (000s) Frame Type Cutting Welding Total Large 530 1,040 1,570 Small 910 1,200 2,110 Total kilowatt hours 1,440 2,240 3,680