Plantwide indirect-cost rates. Automotive Products (AP) designs, manufactures, and sells lePlancwide vanable MOH automotive parts. Actual variable manufacturing overhead costs for 2009 were $308,600. AP’s rate, $77.15 per machine-hour 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 regu-

% larly complained of being charged non-competitive prices, so AP’s controller, Devon Smith, realizes that it is time to examine the consumption of resources more closely. AP 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 plantwide variable manufacturing overhead rate for 2009 and the variable manufacturing overhead allocated to each contract in 2009.
2. Compute the variable manufacturing overhead rate for 2009 and the variable manufacturing overhead allocated to each contract in 2009 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 AP use the information available from its department-by-department analysis of variable manufacturing overhead costs?
5. AP’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?LO1

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Use of Cost Drivers by Customer Variable MOH in United Holden Department Cost Driver 2009 Motors Motors Leland Motors Design CAD design hours $ 39,000 110 200 80 Engineering Engineering hours 29,600 70 60 240 Production Machine hours 240,000 120 2,800 1,080 Total $308,600