Problem:
Automotive products (AP) designs and produces automotive parts. In 2009, 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 realizes that it is time to examine the consumption of overhead resources more closely.
Please see below.
| Department |
Cost Driver |
Variable Manufacturing Overhead in 2009 |
Usage of Cost Drivers by Customer Contract |
|
| United Motors |
Holden Motors |
Leland Vehicle |
|
| Design |
CAD-design hours |
$ 39,000 |
110 |
200 |
80 |
390 |
| Production |
Engineering hours |
29,600 |
70 |
60 |
240 |
370 |
| Engineering |
Machine hours |
240,000 |
120 |
2,800 |
1,080 |
4,000 |
| Total |
|
$308,600 |
300 |
3,060 |
1,400 |
4,760 |
1. Compute the variable manufacturing overhead allocated to each customer in 2009 using the simple costing system that has machine-hours as the allocation base?
2. Compute the variable manufacturing overhead allocated to each customer in 2009 using department-based variable manufacturing overhead rates.
3. Comment on your answers in requirement 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 AP use the information available form its department-by-department analysis of variable manufacturing overhead costs?
5. AP'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?