Car Parts (CP) designs, manufactures, and sells automotive parts. Actual variable manufacturing overhead costs for 2015 were $308,600. CP's simple costing system allocates variable 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 non-competitive prices, so CP's controller, Devon Smith, realizes that it is time to examine the consumption of resources more closely. CP has three main operating departments: design, engineering, and production.

• Design-the design of parts, using state-of-the-art, computer-aided design (CAD) equipment.

• Engineering-the prototyping of parts and testing of their specifications.

• Production-the manufacture of parts.

Interviews with the department personnel and examination of time records yield the following detailed information:

Required
1. Using the simple costing system, compute the plant wide variable manufacturing overhead rate for 2015 and the variable manufacturing overhead allocated to each contract in 2015.
2. Compute the variable manufacturing overhead rate for 2015 and the variable manufacturing overhead allocated to each contract in 2015 using department-based variable overhead rates.
3. 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 customer(s) will be unhappy? How would you respond to these concerns?
4. How else might CP use the information available from its department-by-department analysis of variable manufacturing overhead costs?
5. CP's managers are wondering if they should further refine the 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?

Transcribed Image Text:

Use of Cost Drivers by Customer Holden Motors 200 Variable MOH in 2015 United Motors 110 70 120 Leland Motors Department Design Engineering Production Total Cost Driver CAD design-hours Engineering-hours Machine-hours S 39,000 80 240 1,080 29,600 60 240,000 2,800 S308,600