Methods of Overhead Allocation
A manufacturing company, based in Birmingham, makes auto parts for the motor industry. A division of the company makes two engine components, X and Y. Relevant information on the next budget period for these two components are given below:
|
Productparts
|
X
|
Y
|
|
|
Outputinunits:
|
13,000
|
15,000
|
|
|
Costperunit:
|
|
|
|
|
Directmaterial
|
£45
|
£55
|
|
|
Directlabour
|
£30
|
£25
|
|
|
Totalmachinehours
|
2,500
|
2,300
|
|
|
Numberofproductionruns
|
65
|
75
|
|
|
Ordersexecuted
|
135
|
145
|
|
|
Numberofshipments
|
40
|
35
|
|
The two components are similar and are usually produced in production runs of 200 units. The production overhead is currently absorbed by using a machine hour rate, and the total of the production overhead for the period has been analysed as follows:
|
Overhead
|
Budgetedcost
£
|
Costdriver
|
|
|
Machinedepartmentcosts
|
£360,000
|
machinehours
|
|
|
Set-upcosts
|
£99,400
|
Numberofproductionruns
|
|
|
Inspection/Qualitycontrol
|
£25,900
|
Numberofproductionruns
|
|
|
Materialhandling
|
£156,800
|
Ordersexecuted
|
|
|
Delivery
|
£26,250
|
Numberofshipments
|
|
|
|
£668,350
|
|
|
Required:
(a) Using the Activity Based Cost information, compare the overhead cost per unit in £ and the percentages of overhead costs for the two parts, X and Y.
(b) Using the number of units to assign overhead costs to the parts, A and Y, (a traditional approach) compare the overhead cost per unit in £s and the percentages of overhead costs allocated for the two parts.
(c) Using the data available, explain the differences between the unit overhead costs in percentages between (a) and (b) above.
(d) Discuss the advantages and disadvantages of organization aldecentralisation.