COST ACCOUNTING QUESTION

Plant-wide, department, and ABC indirect cost rates. Automotive Products (AP) designs and produces automotive parts. In 2014, actual variable manufacturing overhead is $308,600. APs 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 APs controller Devon Smith 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

Home Insert Page Layout Formulas Data Review View sage st Drivers by Customer Contract Manufacturing Overhead in 2014 Motors 110 70 120 UnitedHolden Leland Auto 80 240 1,080 Motors 200 60 2,800 Cost Driver CAD-design-hours 2 Department 39,000 29,600 240,000 $308,600 3 Design 5 Engineering 6 Total 1. Compute the manufacturing overhead allocated to each customer in 2014 using the simple costing 2. Compute the manufacturing overhead allocated to each customer in 2014 using department-based 3. Comment on your answers in requirements 1 and 2. Which customer do you think was complaining system that uses machine-hours as the allocation base manufacturing overhead rates. 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? How else might AP use the information available from its department-by-department analysis of manu- facturing overhead costs? 4. 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