Exercise 4-8 Using departmental overhead rates to assess prices LO P2 Way Cool p

Question

Exercise 4-8 Using departmental overhead rates to assess prices LO P2

Way Cool produces two different models of air conditioners. The company produces the mechanical systems in their components department. The mechanical systems are combined with the housing assembly in its finishing department. The activities, costs, and drivers associated with these two manufacturing processes and the production support process follow.

   
Additional production information concerning its two product lines follows.

Required:
1. Determine departmental overhead rates and compute the overhead cost per unit for each product line. Base your overhead assignment for the components department on machine hours. Use welding hours to assign overhead costs to the finishing department. Assign costs to the support department based on number of purchase orders.
2. Determine the total cost per unit for each product line if the direct labor and direct materials costs per unit are $250 for Model 145 and $170 for Model 212.
3. If the market price for Model 145 is $1,700 and the market price for Model 212 is $300, determine the profit or loss per unit for each model.

Process Activity Overhead Cost Driver Quantity Components Changeover $ 470,000 Number of batches 890 Machining 304,000 Machine hours 8,130 Setups 225,000 Number of setups 120 $ 999,000 Finishing Welding $ 192,000 Welding hours 5,200 Inspecting 235,000 Number of inspections 850 Rework 61,000 Rework orders 220 $ 488,000 Support Purchasing $ 145,000 Purchase orders 543 Providing space 33,000 Number of units 4,620 Providing utilities 65,000 Number of units 4,620 $ 243,000 Determine departmental overhead rates and compute the overhead cost per unit for each product line. Base your overhea assignment for the components department on machine hours. Use welding hours to assign overhead costs to the finishing department. Assign costs to the support department based on number of purchase orders. (Round your intermediate calculations and per unit cost answers to 2 decimal places.) Show less Components department inishing department upport department Activity Departmental Total Overhead Cost Driver Model 145 OH Rate Components Finishing Support

Explanation / Answer

Calculation of departmental overhead rates Component department Overhead rate = Total Overhead cost of Component department / Total no.of machine hours Overhead rate = $999000 / 8130 hours = $122.88 per machine hour Finishing Department Overhead rate = Total Overhead cost of Component department / Total no.of welding hours Overhead rate = $488000 / 5200 hours = $93.85 per welding hour Support Department Overhead rate = Total Overhead cost of Component department / Total no.of purchase orders Overhead rate = $243000 / 543 orders = $447.51 Calculation of Overhead cost per unit for each product line Model 145 Activity Driver Departmental OH rate Total Overhead Cost Components 2850 machine hours                122.88 $350,203 Finishing 2000 welding hours                  93.85 $187,692 Support 362 purchase orders                447.51 $162,000 Total Overhead cost assigned to Model 145 $699,895 / Units Produced 1500 Overhead cost per unit $466.60 Model 212 Activity Driver Departmental OH rate Total Overhead Cost Components 5280 machine hours                122.88 $648,797 Finishing 3200 welding hours                  93.85 $300,308 Support 181 purchase orders                447.51 $81,000 Total Overhead cost assigned to Model 145 $1,030,105 / Units Produced 3120 Overhead cost per unit $330.16 Total cost per unit for each product line Model 145 Model 212 Materials and Labour per unit $250.00 $170.00 Overhead cost per unit $466.60 $330.16 Total Cost per unit   $716.60 $500.16 Determination of profit or loss per unit of each model Model 145 Model 212 Market price per unit $1,700.00 $300.00 Cost per unit $716.60 $500.16 Profit (Loss) per unit $983.40 -$200.16

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