From Tesla's 2018 10-k:

"

Cost of automotive sales revenue includes direct parts, material and labor costs, manufacturing

overhead, including depreciation costs of tooling and machinery, shipping and logistic costs,

vehicle connectivity costs, allocations of electricity and infrastructure costs related to our

Supercharger network, and reserves for estimated warranty expenses

."

Publicly disclosed vehicle production numbers from Tesla's Q2 2019 were as follows:

From Tesla's public disclosures we can see that overhead allocation is likely very important to

them. That is, because they currently make three different models of cars in the same factory,

and these different models share some component parts that are also manufactured by Tesla

(electric motors and battery packs), there will be many common costs that are not able to be

directly traced to each type of model.

We do not have information on exactly what overhead costs Tesla has or exactly how Tesla

allocates overhead because these are not required financial disclosures. However, let's make

some assumptions about their overhead costs and cost drivers and see how using activity-based

costing techniques to allocate overhead versus using a single overhead rate might affect their

overhead allocations and ultimately their business decisions.

Vehicle Production Numbers

Model 3

72,531

Model S/X

14,517

Total

87,048

Let's assume Tesla has estimated their total manufacturing overhead costs for the year to be

$2,665,000,000 based on the following schedule of expected overhead costs:

Estimated Annual Overhead Costs (all numbers in 000's)

Depreciation - Tooling (used to make parts)

$220,000

Depreciation - Machinery

740,000

Shipping Costs (for parts used in making both cars)

260,000

Materials Handling Costs

140,000

Utilities (Electricity, water, etc.)

75,000

Depreciation (Fremont Factory)

90,000

Supervisor Salaries

500,000

Set-up Costs

180,000

Engineering Support

215,000

Quality Inspections

245,000

Estimated Total Annual Overhead

$2,665,000

Let's also assume that Tesla tracks the following information for each model type that could be

used as cost drivers. To simplify things let's just focus on the Model 3 and the Model S.

Possible Cost Driver Information

Amount for Model 3

in Q2 2019

Amount for Model S

in Q2 2019

Estimated Total

Annual Amount

Number of units

72,531

9,541

330,000

Direct labor hours

1,589,000

437,529

8,100,000

Number of machine hours

789,321

124,561

2,855,000

Factory square footage*

6,000,000

3,500,000

9,000,000

Number of setups

145,062

57,185

810,000

Number of inspections

6,236,754

1,689,533

31,750,000

Number of unique parts per

vehicle*

8,000

9,000

8,500

Number of shipments

1,800

950

11,000

Number of engineering

support calls

61,870

19,200

325,000

Number of parts

580,248,000

85,869,000

2,665,500,000

Number of engineering

support hours

185,610

86,400

1,090,000

Number of unique

machines used*

200

185

250

* Unlike the other cost drivers listed these items do not increase over time which is why the

estimated annual amounts are similar to the Q2 amounts

Part A:

Using the previously provided information calculate the per unit overhead cost for Q2

2019 for Model 3 and Model S based on allocating manufacturing overhead in a normal costing

system using machine hours as a single cost driver for manufacturing overhead.

Part B:

Select what you believe is the best cost driver for each of the separate overhead costs

listed above if Tesla were to use an activity-based costing system. Prepare schedule that shows

the cost driver that should be paired with each overhead cost. You can use a particular cost driver

more than once if you believe it is the best cost driver for more than one overhead cost.

Part C:

Using the costs drivers you selected for an activity-based costing system in part B

above, calculate the per unit overhead cost for Q2 2019 for Model 3 and Model S based on

allocating overhead in a normal costing system using an activity-based costing approach.

Part D:

Assume that actual overhead for Q2 2019 is $800,000,000. Adjust your calculations

under both Parts A and C to reflect the needed adjustment to actual overhead costs. Hint: the

adjustment should be made based on the total allocated overhead to each model before

adjustment.

Part E:

Provide a brief description and analysis of the differences in the overhead costs per unit

that you calculated in Parts A and C above (use the amounts after making the required

adjustment in part D). This description and analysis should note the amount and direction of any

differences in overhead costs across the two methods for each model and should be focused on

the specific reasons for the majority of the difference between these two overhead allocation

methods.

Part F:

Name at least two business decisions that Tesla may make differently if they use an

activity-based costing system rather than a single volume-based cost driver to allocate

manufacturing overhead. Be sure to describe

why

these business decisions are likely to change

with an activity-based costing system.