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 AP’s 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.   Compute the manufacturing ov

FINANCIAL ACCOUNTING
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ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Automotive Products (AP) designs and
produces automotive parts. In 2014, actual variable manufacturing overhead is $308,600. AP’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 AP’s 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.

 

Compute the manufacturing overhead allocated to each customer in 2014 using the simple costing
system that uses machine-hours as the allocation base.
2. Compute the manufacturing overhead allocated to each customer in 2014 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?

Home
Insert
Page Layout
Formulas
Data
Review
View
B
C
F
E
Usage of Cost Drivers by Customer
Contract
1
Manufacturing
United
Holden
Leland
Department
3 Design
4 Production
5 Engineering
6 Total
2
Cost Driver
Overhead in 2014
Motors
Motors
Auto
CAD-design-hours
Engineering-hours
Machine-hours
$ 39,000
110
200
80
29,600
240,000
$308,600
70
60
240
120
2,800
1,080
Transcribed Image Text:Home Insert Page Layout Formulas Data Review View B C F E Usage of Cost Drivers by Customer Contract 1 Manufacturing United Holden Leland Department 3 Design 4 Production 5 Engineering 6 Total 2 Cost Driver Overhead in 2014 Motors Motors Auto CAD-design-hours Engineering-hours Machine-hours $ 39,000 110 200 80 29,600 240,000 $308,600 70 60 240 120 2,800 1,080
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