To compare plantwide and departmental overhead allocation methods.

Information:

All of WCBs overhead has traditionally been allocated using direct labor hours as the plantwide driver, so the company decided to reject their customers invitation to perform power systems harmonics analysis. Based on your training in allocating OH, however, you are sure that the company has made a mistake and should have accepted the new job.

You have decided to demonstrate both the benefits of switching to the departmental method and the benefit of the opportunity offered by the client by comparing the overhead costs allocated to the electrical design and energy reduction projects using the plantwide and departmental drivers from last year.[1]

The following table presents information about the two types of projects performed from last year:

	Electrical Designs	Energy Reductions
Projects per Year	5,150	1,288
DM Costs	$5,000	$1,000
DL Costs	$6,000,000	$2,800,000
Direct Labor Hours	80,000	20,000
Computer Hours	100,000	45,000
Inquiries Made	6,000	500
Review Hours	7,750	2,500

Both types of projects pass through two separate production departments: data gathering and analysis. The following table presents information about these two departments from last year:

	Data Gathering	Analysis			Data Gathering	Analysis
Direct Labor Hours				Overhead Costs
Electrical Designs	60,000	20,000		Setup Costs	$900,000	$900,000
Energy Reductions	15,000	5,000		Inspection Costs	$100,000	$160,000
Total	75,000	25,000		Utilities	$55,000	$100,000
Computer Hours				Maintenance	$255,000	$255,000
Electrical Designs	50,000	50,000		Total	$1,310,000	$1,415,000
Energy Reductions	18,000	27,000
Total	68,000	77,000
Inquiries Made
Electrical Designs	5,500	500
Energy Reductions	450	50
Total	5,950	550

Assignment:

1- Identify key assumptions: What key assumptions must be made in order to compare the plantwide and departmental overhead allocation methods? Do you feel that these assumptions are valid? Explain.

2- Compute the overhead cost per unit for each product (Electrical Designs and Energy Reductions) using direct labor hours as the plantwide cost driver.

3- Compute the overhead cost per unit for each product using the departmental rates. In calculating departmental rates, use direct labor hours as the driver for the Data Gathering department and computer hours for the Analysis department.

4- Re-compute the overhead cost per unit for each product using inquiries made as the driver for the data gathering department and direct labor hours for the analysis department.

5- Which set of drivers, direct labor hours and computer hours or inquiries made and direct labor hours, do you think is most appropriate? Defend your answer.

6- Using the numbers from the previous problem and your answers to question 4 in this problem, what would be the total cost of the new project if inquiries made and direct labor hours were used as the departmental drivers?

7- Based on your answer to question 6, do you now think WCB should accept the special project? Explain.