Assignment
Problem 1.
Dowdy company produces 2 models of widgets: model A and model B. Both models consume services of 2 departments in the factory. Model A is more popular in the market place. The company sets market prices by adding a 10% markup to the total cost of production. Table 1 providesthe production data for both models.
Table 1
Model based data
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Model based data
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Model A
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Model B
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Units manufactured per year
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30,000
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300,000
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Direct material and Direct labour costs
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$105,000
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$1,000,500
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Direct labour hours
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41,000
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401,000
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Machine hours
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21,000
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201,000
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Number of production runs or setups (note 1)
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40
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60
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Inspection hours (note 2)
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890
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1250
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Note 1: each model is produced in batches. A production run refers to the production of batch in Depts 1 and 2, which involves setting up machines. Dept 1 will have 40 production runs for model A, Dept 2 will also have 40 production runs for model A. The cost of production runs is directly related to the cost of setting up machines in Table 3.
Note 2: Inspection hours are consumed to ensure the quality of products manufactured
Table 2 provides information about the 2 production departments utilised by the 2 models.
Table 2
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Department data
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Department 1
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Department 2
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Direct labour hours:
Model A
Model B
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30,500
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10,500
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45,500
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355,500
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Total
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76,000
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366,000
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Machine hours:
Model A
Model B
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10,500
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10,500
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160,500
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40,500
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Total
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171,000
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51,000
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Total overhead costs
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$340,500
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$280,500
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Table 3 provides a breakdown of the departmental overhead costs, viz. $340,500 and $280,500.
Table 3
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Department data
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Overhead costs:
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Department 1
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Department 2
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Total cost of setting up machines. (note 3)
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$90,000
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$45,000
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Inspection costs
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70,250
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95,250
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Power
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100,000
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70,000
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Miscellaneous
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80,250
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70,250
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Total
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$340,500
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280,500
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Note 3: The cost of setting up machines remains the same per set-up (for each batch) regardless of how many units are manufactured in each batch.
Required (round off all overhead rates to 2 decimal places). Show all calculations.
1. Compute the plantwideoverhead cost rate, using direct labour hours as the cost driver (or activity base).
2. Apply the rate in (1) to models A and B. Calculate the amount of overhead allocated to each unit of models A and B.
3. Calculate departmental overhead cost rates: use machine hours for Dept 1, and labour hours for Dept 2.
4. Apply these rates in (3) to models A and B. Calculate the amount of overhead allocated to each unit of models A and B.
5. Compare the overhead allocation methods under 1 and 3 for each model. Clearly explain (by referring back to the case facts)the differences in allocated costs with respect to each model. This part requires a narration that explains any figures calculated to highlight differences in allocated amounts: students cannot just provide calculations without providing a detailed explanation. The marking criteria listed in the rubric provided will be applied in assessing part (5): please ensure that the answer is written in full sentences and using paragraphs. An answer with key words only, which are not developed into a reasoned argument, is not acceptable for second-year assignments. Please see rubric for criteria used to assess the quality of this answer.