Auerbach Enterprises manufactures air conditioners for automobiles and trucks manufactured throughout North America. The company designs its products with flexibility to accommodate many makes and models of automobiles and trucks. The companyâ€™s two main products are MaxiFlow and Alaska. MaxiFlow uses a few complex fabricated parts, but these have been found easy to assemble and test. On the other hand, Alaska uses many standard parts but has a complex assembly and testing process. MaxiFlow requires direct materials costs which total $135 per unit, while Alaskaâ€™s direct materials requirements total $110 per unit. Direct labor costs per unit are $75 for MaxiFlow and $95 for Alaska.
Auerbach Enterprises uses machine hours as the cost driver to assign overhead costs to the air conditioners. The company has used a company-wide predetermined overhead rate in past years, but the new controller, Bennie Leon, is considering the use of departmental overhead rates beginning with the next year.
The following planning information is available for the next year for each the four manufacturing departments within the company:
Radiator parts fabrication………….. Radiator assembly, weld, and test…. Compressor parts fabrication………. Compressor assembly and test……..
Overhead Costs $ 80,000 100,000 120,000 180,000 $480,000
Machine Hours 10,000 20,000 5,000 45,000 80,000
Normally, the air conditioners are produced in batch sizes of 20 at a time. A production batch of 20 units requires the following number of hours in each department:
Radiator parts fabrication……….. 28 16 Radiator assembly, weld, and test……. 30 74 Compressor parts fabrication……… 32 8 Compressor assembly and test……… 26 66
Total 116 164
1. Compute the departmental overhead rates using machine hours as the cost driver.
2. Compute a company-wide overhead rate using machine hours as the cost driver.
3. Compute the overhead costs per batch of MaxiFlow and Alaska assuming:
(a) The company-wide rate.
(b) The departmental rates.
4. Compute the total costs per unit of MaxiFlow and Alaska assuming:
(a) The company-wide rate.
(b) The departmental rates.
5. Is one product affected more than the other by use of departmental rates rather than a company-wide
rate? Why or why not?
I write some of it so here it is:
Auerbach Enterprises is a North American manufacturer that manufacturers air conditioners for various cars and trucks. This company thrives to make air conditioners for almost any make and model vehicle. They have two main products that they use for their products called Maxiflow and Alaska. MaxiFlow is an easier product to test and assemble and it uses only a few complex fabricated parts. Alaska uses standard parts and has a more complex assembly and test process. MaxiFlow has a higher direct material cost which is set at $135 per unit, but it has a lower direct labor cost which is set at $75. Alaska on the other hand has a lower material cost set at $110 per unit but a higher direct labor cost which is set at $95. In this paper I will explain the department overhead costs and the company-wide costs when using the machine hours as the cost drive.
Department Overhead Rates
A department overhead rate is the departments direct and indirect overhead expenses. A company can find this rate by taking the overhead cost and dividing it by the total machine hours. The radiator fabrication department would be $80,000, which is the overhead, divided by 10,000 which are the machine hours and that would give a total overhead rate or $8.00. The radiator assembles, weld, and test department has a overhead of $100,000 and a total of 20,000 machine hours which would give us a total of $5.00 for the overhead rate. The compressor parts fabrication department would be $120,000 divided by 5,000 machine hours equals a overhead rate of $24.00. And lastly, the compressor assembly test department would be $180,000 divided by 45,000 which is $4.00.
Company-Wide Overhead Rates
To find the company-wide overhead cost, the company would have to add up all of the overhead costs throughout the departments and divide the total by the total machine hours of all of the departments. To do this the company would take the radiator parts fabrication department and add that by the radiator assembly, weld, test and then add that to the compressor parts fabrication and lastly add on the compressor assembly and test department. It would look like 80,000 + 100,000 + 120,000 + 180,000 which would have a total of $480,000 of overhead costs. Next the company would do the same thing for the machine hours. Take each department and add those up to get a total. The machine hours would look like 10,000 + 20,000 + 5,000 + 45,000 and this equals a total of 80,000 machine hours. Once the totals are found for the overhead costs and the machine hours or each department the company would then take the overhead costs and divide that by the machine hours. This would look like $480,000 divided by 80,000 and this would give a total of $6.00. This means the company-wide overhead cost is $6.00 per machine hour.
Overhead cost per batch of MaxiFlow and Alaska
In order to find out the rates per batch, the number of hours of each batch must be multiplied by the overhead rate per hour. The departmental rate for MaxiFlow would be 28 x $8.00 which equals $224.00 for the radiator parts fabrication department. For the radiator assembly, weld, and test department it would be 30 x $5.00 which is $150.00. The compressor parts fabrication is 32 x $24.00 which is $768.00. And lastly, the compressor assembly and test would be 26 x $4.00 and that is $104.00. For Alaska it would be 16 x $8.00 which is $128.00 for radiator parts fabrication. The radiator assembly, weld, and test is74 x $5.00 which is $370.00. The compressor parts fabrication is 8 x $24.00 which equals $192.00, and lastly, the compressor assembly and test is 66 x $4.00 which is $264.00.