Car PlantCar Plant

(CPCP)

designs and produces automotive parts. In

20172017,

actual variable manufacturing overhead is

$ 330 comma 080$330,080.

CP'sCP'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 noncompetitive prices, so

CP'sCP's

controller

DrewDrew

GilbertGilbert

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:

Car PlantCar Plant

(CPCP)

designs and produces automotive parts. In

20172017,

actual variable manufacturing overhead is

$ 330 comma 080$330,080.

CP'sCP'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 noncompetitive prices, so

CP'sCP's

controller

DrewDrew

GilbertGilbert

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:

Requirement 1. Compute the manufacturing overhead allocated to each customer in

20172017

using the simple costing system that uses machine-hours as the allocation base.Determine the formula needed to calculate overhead using the simple costing method and then calculate

CPCP's

manufacturing overhead rate for

20172017.

(Round your answer to the nearest cent.)

	/		=	Manufacturing overhead rate
	/		=		per machine hour

Calculate the overhead allocated to each customer using the simple costing method. (Round your answers to the nearest whole dollar.)

	Machine	Overhead
Customer	Hours Used	Allocated
State Motors
Caufield Motors
Jarrin Auto

Requirement 2. Compute the manufacturing overhead allocated to each customer in

20172017

using department-based manufacturing overhead rates. (Abbreviations used: Dept. = Department.)

Determine the formula used to calculate the department-based manufacturing overhead rates:

/

=

Manufacturing overhead rate by dept.

CPCP's

20172017

manufacturing overhead rates by department are as follows:

	Manufacturing Overhead Rate
Department	(by Department)
Design		per
Engineering		per
Production		per

Calculate the overhead allocated to each customer, by department, using the departmental manufacturing overhead rates calculated in the previous step. Calculate the total overhead cost for each department and each customer.

	State	Caufield	Jarrin
Department	Motors	Motors	Auto	Total
Design
Engineering
Production
Total

Requirement 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 pricecontracts, which customer(s) will be unhappy? How would you respond to these concerns?

Under the simple-costing system,

Caufield

Jarrin

State

was likely unhappy about their bill, because the contract appears to have been

overcosted

undercosted

. If the new department-based rates are used to price contracts,

Caufield

Jarrin

State

will likely be happier about their bill.If the new department-based rates are used to price contracts,

Caufield and Jarrin

State and Caufield

State and Jarrin

will likely be unhappy. This is because their bills under the simple-costing system appear to have been

overcosted

undercosted

. Using thedepartment-based rates, their bills will be

higher

lower

. If the new department-based rates are used,

CPCP

should explain to the unhappy customers how the calculation was done, and point out their high use of

design and engineering resources

production machine hours

relative to

design and engineering resources

production machine hours

.Requirement 4. How else might

CPCP

use the information available from its department-by-department analysis of manufacturing overhead costs? (Select all that apply.)Other than for pricing,

CPCP

can also use the information from the department-based system

A.

to reevaluate employee pay scales.

B.

to examine and streamline its own operations so that there is maximum value-added from all indirect resources.

C.

to provide incentives to professional staff.

D.

to set targets over time to reduce both the consumption of each indirect resource and the unit costs of the resources.

Requirement 5.

CPCP'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?

A.

If a single activity accounts for a sizable proportion of the department's costs.

B.

If significant costs are incurred on different activities within a department, but each activity has the same cost driver.

C.

If there wasn't much variation among contracts in the consumption of activities within a department.

D.

All of the above

Usage of Cost Drivers by Customer

Contract

Manufacturing

State

Caufield

Jarrin

Department

Cost Driver

Overhead in 2017

Motors

Motors

Auto

Design

CAD-design-hours

$39,000

110

200

80

Engineering

Engineering-hours

31,080

70

60

240

Production

Machine-hours

260,000

120 2,800 1,080 Total $330,080

1.	Compute the manufacturing overhead allocated to each customer in 20172017 using the simple costing system that uses machine-hours as the allocation base.
2.	Compute the manufacturing overhead allocated to each customer in 20172017 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 CPCP use the information available from itsdepartment-by-department analysis of manufacturing overhead costs?
5.	CPCP's managers are wondering if they should further refine thedepartment-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?