Compute Departmental And Company-Wide Overhead Rates
Compute departmental and company-wide overhead rates, overhead costs, and unit costs for MaxiFlow and Alaska products
This assignment involves analyzing the manufacturing overhead costs for Auerbach Enterprises, a company producing two main products: MaxiFlow and Alaska, used in automobile and truck air conditioning systems. The task requires calculating departmental overhead rates based on machine hours, comparing these with a company-wide overhead rate, and applying these rates to determine overhead costs and total costs per batch and per unit for each product. The final part requires an analysis of how product costs are affected by the choice of costing method.
Paper For Above instruction
Introduction
Effective overhead cost allocation is crucial for accurate product costing and strategic decision-making. In manufacturing settings like Auerbach Enterprises, where multiple products with differing production complexities are produced, traditional cost allocation methods such as company-wide rates may not accurately reflect the actual resource consumption. This paper computes both departmental and company-wide overhead rates, applies these to determine overhead costs per batch and per unit for MaxiFlow and Alaska, and analyzes the impact of these approaches on product costing accuracy.
Departmental Overhead Rate Calculation
Using machine hours as the cost driver, the departmental overhead rates are calculated by dividing each department’s total overhead costs by its total machine hours. The necessary data are summarized as follows:
- Radiator parts fabrication: $80,000 overhead, 10,000 machine hours
- Radiator assembly, weld, and test: $100,000 overhead, 20,000 machine hours
- Compressor parts fabrication: $120,000 overhead, 5,000 machine hours
- Compressor assembly and test: $180,000 overhead, 45,000 machine hours
The departmental rates are computed as:
\[
\text{Rate} = \frac{\text{Overhead Cost}}{\text{Machine Hours}}
\]
Therefore,
- Radiator parts fabrication: $80,000 / 10,000 hrs = $8 per machine hour
- Radiator assembly, weld, and test: $100,000 / 20,000 hrs = $5 per machine hour
- Compressor parts fabrication: $120,000 / 5,000 hrs = $24 per machine hour
- Compressor assembly and test: $180,000 / 45,000 hrs = $4 per machine hour
Company-Wide Overhead Rate Calculation
The total overhead cost and total machine hours are combined:
- Total overheads: $80,000 + $100,000 + $120,000 + $180,000 = $480,000
- Total machine hours: 10,000 + 20,000 + 5,000 + 45,000 = 80,000 hours
The company-wide overhead rate is:
\[
\text{Company-wide rate} = \frac{\$480,000}{80,000 \text{ hrs}} = \$6 \text{ per machine hour}
\]
Overhead Costs Per Batch of MaxiFlow and Alaska
Using the departmental rates and machine hours per batch:
| Department | MaxiFlow Hours | Alaska Hours | Dept. Rate | MaxiFlow Cost | Alaska Cost |
|--------------|------------------|----------------|------------|--------------|--------------|
| Radiator parts fabrication | 28 | 16 | $8/hr | 28 $8 = $224 | 16 $8 = $128 |
| Radiator assembly, weld, and test | 30 | 74 | $5/hr | 30 $5 = $150 | 74 $5 = $370 |
| Compressor parts fabrication | 32 | 8 | $24/hr | 32 $24= $768 | 8 $24= $192 |
| Compressor assembly & test | 26 | 66 | $4/hr | 26 $4= $104 | 66 $4= $264 |
Total overhead per batch:
- MaxiFlow: $224 + $150 + $768 + $104 = $1,246
- Alaska: $128 + $370 + $192 + $264 = $954
Applying the company-wide rate of $6 per machine hour:
| Department | MaxiFlow Hours | Alaska Hours | Cost at $6/hr (MaxiFlow / Alaska) |
|--------------|------------------|----------------|----------------------------------|
| Radiator parts fabrication | 28 | 16 | 28 $6 = $168 | 16 $6 = $96 |
| Radiator assembly, weld, and test | 30 | 74 | 30 $6 = $180 | 74 $6 = $444 |
| Compressor parts fabrication | 32 | 8 | 32 $6 = $192 | 8 $6 = $48 |
| Compressor assembly & test | 26 | 66 | 26 $6 = $156 | 66 $6 = $396 |
Total overhead costs per batch:
- MaxiFlow: $168 + $180 + $192 + $156 = $696
- Alaska: $96 + $444 + $48 + $396 = $984
Total Cost Per Unit Calculations
Based on costs per batch, the per-unit costs are computed assuming batch size of 20 units:
| Calculation | MaxiFlow | Alaska |
|--------------|----------|--------|
| Using departmental rates | Cost per batch / 20 | Cost per batch / 20 |
| - Overhead (from above) | $1,246 / 20 = $62.30 | $954 / 20 = $47.70 |
| - Direct materials | $135 | $110 |
| - Direct labor | $75 | $95 |
| Total cost per unit | (Overhead + Materials + Labor) | (Overhead + Materials + Labor) |
- MaxiFlow (departmental rates):
$62.30 + $135 + $75 = $272.30
- Alaska (departmental rates):
$47.70 + $110 + $95 = $252.70
Similarly, with company-wide rates:
| Calculation | MaxiFlow | Alaska |
|--------------|----------|--------|
| Overhead per batch / 20 | $696 / 20 = $34.80 | $984 / 20 = $49.20 |
| Total cost per unit | Overhead + Materials + Labor |
- MaxiFlow:
$34.80 + $135 + $75 = $244.80
- Alaska:
$49.20 + $110 + $95 = $254.20
Analysis of Product Cost Impact
The use of departmental rates significantly affects the cost per unit for each product. MaxiFlow's overhead costs are relatively high under departmental costing due to the allocation of costs in the assembly and fabrication departments, reflecting the complex assembly process. Conversely, Alaska’s overhead costs are somewhat lower when using departmental rates compared to the company-wide rate because of their specific machine hours.
The discrepancies between the two methods imply that departmental costing provides a more accurate reflection of the actual resources consumed by each product. If only the company-wide rate were used, Alaska's overhead would be over-applied relative to its actual resource usage, potentially leading to distorted product costing and misinformed pricing decisions. MaxiFlow's costs show less variation between methods, but the departmental approach better accounts for its complex assembly process.
This analysis demonstrates that departmental overhead rates are generally more precise for products with diverse manufacturing processes, especially when products differ significantly in their use of production resources. The choice of costing method directly influences profit margins, cost control measures, and strategic decisions related to pricing, product development, and process improvements.
Conclusion
Calculating departmental overhead rates based on machine hours provides a nuanced view of resource consumption and supports more accurate product costing. While the company-wide rate offers simplicity, it can lead to cost distortions, particularly when products differ considerably in their manufacturing processes. In the case of Auerbach Enterprises, departmental costing better captures the complexities of MaxiFlow and Alaska production, facilitating more accurate decision-making and resource allocation.
References
- Drury, C. (2018). Management and cost accounting (11th ed.). Cengage Learning.