Use of Cost Drivers by Customer Variable State Hamlet Leland Department Design Cost Driver CAD design-hours $ MOH in 2018 Motors Motors Vehicle 44,100 120 210 90 Engineering Engineering-hours 33,150 80 50 260 240,000 Production Machine-hours 90 2,000 910 $ 317,250 Total 1. Using the simple costing system, compute the plantwide variable manufacturing overhead rate for 2018 and the variable manufacturing overhead allocated to each contract in 2018. 2. Compute the variable manufacturing overhead rate for 2018 and the variable manufacturing overhead allocated to each contract in 2018 using department-based variable 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 variable manufacturing overhead costs? 5. RC'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? Roadster Company (RC) designs, manufactures, and sells automotive parts. Actual variable manufacturing overhead costs for 2018 were $317,250. RC'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 non-competitive prices, so RC's controller, Mark Delaney, realizes that it is time to examine the consumption of resources more closely. RC has three main operating departments: design, engineering, and production. Designthe design of parts, using state-of-the-art, computer-aided design (CAD) equipment. Engineeringthe prototyping of parts and testing of their specifications. Productionthe manufacture of parts. Interviews with the department personnel and examination of time records yield the following detailed information. (Click the icon to view the cost drivers information.) Required Requirement 1. Using the simple costing system, compute the plantwide variable manufacturing overhead rate for 2018 and the variable manufacturing overhead allocated to each customer in 2018. Determine the formula needed to calculate overhead using the simple costing method and then calculate RC's variable manufacturing overhead rate for 2018. (Round your answer to the nearest cent.) Variable overhead rate - Simple costing per machine-hour Calculate the overhead allocated to each customer using the simple costing method. (Round your answers to the nearest cent.) State Hamlet Leland Motors Motors Motors Total Variable overhead allocations (simple costing system) Requirement 2. Compute the variable manufacturing overhead rate for 2018 and the variable manufacturing overhead allocated to each customer in 2018 using department-based variable overhead rates. Determine the formula used to calculate the department-based variable manufacturing overhead rates: RC's 2018 variable manufacturing overhead rates by department are as follows. Department Design Engineering Production. Variable Manufacturing Overhead Rate (by Department) per per per Variable overhead rate by department Calculate the overhead allocated to each customer, by department, using the departmental variable manufacturing overhead rates calculated in the previous step. Calculate the total overhead cost for each department and each customer. State Hamlet Leland Department Design Engineering Production Total Motors Motors Motors 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 price contracts, which customer(s) will be unhappy? How would you respond to these concerns? Under the simple costing system, bill. was likely unhappy about its bill because the contract appears to have been If the new department-based rates are used to price contracts, their bills will be If the new department-based rates are used to price contracts, will likely be happier about its will likely be unhappy. This is because their bills under the simple costing system appear to have been If the new department-based rates are used, RC should explain to the unhappy customers how the calculation was done and point out their high use of Requirement 4. How else might RC use the information available from its department-by-department analysis of variable manufacturing overhead costs? Other than for pricing, RC can also use the information from the department-based system to to its own operations so that there is maximum value both the consumption of each indirect resource and the unit costs of the resources. The department-based system gives RC more opportunities for targeted cost management. relative to Using the department-based rates, from all indirect resources. It might set targets over time Requirement 5. RC'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? (Round the percentage to the nearest whole percent.) It worthwhile to further refine the costing system into an ABC system if there department were, in fact, driven by CAD design-hours, then the more refined system would be Even if there were sufficient variation, considering the relative sizes of the three department cost pools, it among contracts in the consumption of activities within a department. If, for example, most activities within the design than the department-based cost system. to further analyze the production cost pool, which consumes % of the manufacturing overhead.