5 21 (Plant wide, department, and ABC indirect cost rates ) Roadster Company (RC) designs and produces automotive parts In 2017, actual variable manufacturing overhead is $280,000 RCs 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 noncompetitive prices, so RCs controller Matthew Draper realizes that it is time to examine the consumption of overhead resources more closely He knows that there are three main departments that consume overhead resources design, production, and engineering Interviews with the department personnel and examination of time records yield the following detailed information Usage of Cost Drivers by Cust Contract Manufacturing Southern Caesar Juniper Department Cost Driver OH in 2017 Motors Motors Motors Design CAD design hours $35,000 150 200 100 Production Engineering hours $25,000 130 100 270 Engineering Machine hours $220,000 300 3,700 1,000 Total $280,000 Show calculations 1 Compute the manufacturing overhead allocated to each customer in 2017 using the simple costing system that uses machine hours as the allocation base 2 Compute the manufacturing overhead allocated to each customer in 2017 using department based manufacturing 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 RC use the information available from its department by department analysis of manufacturing overhead costs 5 RCs 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

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5-21 (Plant-wide, department, and ABC indirect cost rates.) Roadster Company (RC) designs and produces automotive parts. In 2017, actual variable manufacturing overhead is $280,000. RCs

5-21 (Plant-wide, department, and ABC indirect cost rates.) Roadster Company (RC) designs and produces automotive parts. In 2017, actual variable manufacturing overhead is $280,000. RCs 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 noncompetitive prices, so RCs controller Matthew Draper realizes that it is time to examine the consumption of overhead resources more closely. He knows that there are three main departments that consume overhead resources: design, production, and engineering. Interviews with the department personnel and examination of time records yield the following detailed information:

		Usage of Cost Drivers by Cust. Contract
		Manufacturing	Southern	Caesar	Juniper
Department	Cost-Driver	OH in 2017	Motors	Motors	Motors
Design	CAD-design-hours	$35,000	150	200	100
Production	Engineering-hours	$25,000	130	100	270
Engineering	Machine-hours	$220,000	300	3,700	1,000
Total		$280,000

Show calculations:

1. Compute the manufacturing overhead allocated to each customer in 2017 using the simple costing system that uses machine-hours as the allocation base.

2. Compute the manufacturing overhead allocated to each customer in 2017 using department-based manufacturing 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 RC use the information available from its department-by-department analysis of manufacturing overhead costs?

5. RCs 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?