Auerbach Enterprises Essays Example

1. Compute the departmental overhead rates using machine hours as the cost driver.
Overhead rates are calculated by dividing the estimated manufacturing overhead cost by the base allocated. The allocation base can either be direct labor hours, direct labor dollars, machine hours and direct material. In this question, the cost drive used is total machine hours
Overhead rate = estimated manufacturing overhead cost/estimated total machine hours

Maxi flow department

The total manufacturing overhead cost comprises of radiator parts fabrication cost, heater assembly, weld and test costs, compressor parts fabrication cost and compressor assembly and test cost.

The total manufacturing overhead cost is 480000 dollars

The allocation base that I used is that of the total machine hours
= 480000/116hours
= $4137.9 per hour for 20 units
During the production as the company produces the product in batches, each batch has 20 units. For a single unit, the rate applied will be different thus;

For one unit

= $4137.9/20
= $206.89 per machine hour

Alaska Department

= 480000/164 hours
= 2926.8 per machine hour
During the production as the company produces the product in batches, each batch has 20 units. For a single unit, the rate applied will be different thus;
= 2926.8/20
= 146.34 per machine hour
2. Compute a company-wide overhead rate using machine hours as the cost driver.

The method utilized in the computation of the overhead rate for companywide is called the single predetermined cost method

Overhead rates= estimated manufacturing overhead cost/estimated total machine hours
Total overhead cost= 480,000
Total machine hours= 10000 hours
=480000/10000 hours
= $ 48 per machine hour
3. Compute the overhead costs per batch of Maxi-Flow and Alaska assuming:
(a) The company-wide rate.
Overhead cost= estimated manufacturing overhead cost/ estimated total units in the allocation base
Manufacturing cost= 480000
Machine hour= 10000 hours
= 480000/10000 hours
= $ 48 per machine hour

Total hours used in the production of the two departments is

= 116 + 164
= 280 machine hours
The allocation rate is 48 dollars per machine hour hence the total machine hours of the two departments will be multiplied by the distribution rate to get the overhead cost
= 48*280
= 13440
(b) The departmental rates.

Max flow

= 480000/116hours
= 4137.9 dollars
For the total number of units, the rate will be multiplied by the total number of units. The number of units produced is 20
= 4137.9*20
= $82758

Alaska Department

= 480000/164 hours
= 2926.8 per machine hour
= 2926.8*20
= $58536
4. Compute the total costs per unit of Maxi-Flow and Alaska assuming:
(a) The company-wide rate.
Manufacturing cost= 480000
Total units= 40 units
Total number of hours= 10000
= 480000/10000
= $48 per machine hours

Machine hours used by Maxi-flow and Alaska in the production of the batches containing 20 units each is

= 116 + 164
= 280 machine hours
The total cost of the two departments will then be computed by multiplying the company-wide rate the total number of machine hours for the two products. Then one divides the result by 40 which is the number of units produced as each product produces 20 units per batch
= 48*280
= $13,440
= 13440/40
= $336
(b) The departmental rates.
Maxi flow department
= 480000/116hours
= 4137.9 per machine hour for 20 units

For one unit

= 4137.9/20
= $206.89 per unit

Alaska Department

= 480000/164 hours
= 2926.8 per hour
= 2926.8/20
= 146.34 per unit
5. Is one product affected more than the other by use of departmental rates rather than a company-wide rate? Why or why not?
The advantage of using departmental overhead rates over the company-wide rates is that the different departments in a company do not incur the same total manufacturing overhead cost. They also do not use the same number of labor hours nor do they use the same machine hours. The use of company-wide overhead rates will not produce accurate measures of the cost that each department incurs associated with each unit produced.
Companies that use departmental overhead rates method get more accurate measurements than those that use company-wide overhead rates method. The explanation only means that all the goods are affected in the calculation the difference comes in application of different amounts to various departments, unlike the company-wide method.
Most managers are now using departmental overheads rate methods. The main reason as stated above it is the most accurate method. It involves applying actual amounts used by the different departments; the opposite happens when using the company-wide as it involves using estimated values in the calculation. The new method that has been introduced by the new manager is more efficient. It helps the manager to control the costs as well as it can play the role of a checklist for the production cost (Fotache, Fotache, Bucşă & Ocneanu, 2011). Based on the calculation it is cheaper to use the company-wide method, as there is absorption of some cost and cutting of some hours. However, it is a risky venture in that it can create a false sense of security in the firm when it has no enough more for production. It is thus suitable for managers in large enterprises use departmental rates method.
Managers should consider various steps when it comes to reduction of the production cost (Fotache, Fotache, Bucşă & Ocneanu, 2011). The company can opt to reduce the material cost, by substituting equally good but less expensive material. The company can also reduce the overhead cost by creating the budgets for then at periodic intervals thus controlling their expenditure.
Investing more capital in the production is at times the best way of reducing the cost of production. The funds can be used to buy modern equipment that increase the output levels while it also reduces the time take in the production process at the same time (Nimocks, 2005). Investing more capital also reduces labor cost, as the modern equipment will contribute to reducing the number of the labor force required for the production.

References

Fotache, G., Fotache, M., Bucşă, R. C., & Ocneanu, L. (2011). The Changing Role of Managerial Accounting in Decision Making Process Research on Managing Costs. Economy Transdisciplinarity Cognition, 14(2), 45-55.
Nimocks, S. P. (2005). Managing overhead costs. Mckinsey Quarterly, (2), 106-117.