McNeil Office makes standard metal five-drawer desks. Occasionally, the company takes custom orders. McNeil’s overhead costs for a month in which no custom desks are produced are as follows:
Purchasing Department for raw material and supplies
(20 purchase orders) ................. $ 10,000
Setting up machines for production runs
(4 times per month after maintenance checks) ........ 2,480
Utilities (based on 6,400 machine hours) .......... 320
Supervisor salaries ..................... 16,000
Machine and building depreciation (fixed) .......... 11,000
Quality control and inspections performed on random
selection of desks each day; one quality control worker ... 5,000
Total overhead costs ................... $ 44,800
Factory operations are highly automated, and overhead is allocated to products based on machine hours.
In July 2013, six orders were filled for custom desks. Selling prices were based on charges for actual direct material, actual direct labor, and the overhead rate per machine hour. During July, the following costs were incurred for 6,400 hours of machine time:
Purchasing Department for raw material and supplies (44 purchase orders).......$ 12,400
Setting up machines for production runs (18 times)....................3,280
Utilities (based on 6,400 machine hours).......................................320
Supervisor salaries 16,000 Machine and building depreciation (fixed)......11,000
Quality control and inspections performed on random selection of
desks each day; one quality control worker.............................5,960
Engineering design and specification costs................................6,000
Total overhead costs..............................................................$ 54,960
a. How much of the purchasing department cost is variable and how much is fixed? What types of purchasing costs would fit into each of these categories?
b. Why might the number of machine setups have increased from four to 18 when only six custom orders were received?
c. Why might the cost of quality control and inspections have increased?
d. Why were engineering design and specification costs included during July?
e. If McNeil Office were to adopt activity-based costing, what would you suggest as the cost drivers for each of the overhead cost items?
f. What is the current predetermined overhead rate based on machine hours? Do you think the custom orders should have been priced using this rate per machine hour? Explain the reasoning for your answer.