### Compute manufacturing overhead allocated to each customer

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Problem-

Plant-wide, department, and ABC indirect cost rates. 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.

 A B C D E F 1 Department Cost driver Manufacturing Overhead in 2014 Usage of Cost Drivers by Customer Contract 2 United Motors Holden  Motors Leland Auto 3 Design CAD-design-hours \$39,000 110 200 80 4 Production Engineering-hours 29,600 70 60 240 5 Engineering Machine-hours 240,000 120 2,800 1,080 6 Total \$308,600

1. 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?

4. How else might AP use the information available from its department-by-department analysis of 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?

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