Reference no: EM132614753

Orleans Manufacturing produces ornamental light posts for sale to municipalities and real estate developers. There are two models of light posts: A traditional style named Old Orleans, and a modern design which is called New Orleans.

The company has asked you to examine their cost structures of their two product lines, with a particular focus on the assignment of overhead costs. Presently, overhead is assigned to product using functional based costing based on direct labour hours.

Production plans for 2008 include 1,600 Old Orleans light posts and 2,000 New Orleans light posts. Each light post requires one hour of machine time. Due to the ornate nature of the Old Orleans product, each unit requires 18 hours of direct labour in production, compared to only 3.1 hours for the much simpler New Orleans product. Both products use the same type of materials, though each Old Orleans unit requires 2.5 times as much direct materials as a New Orleans unit.

The table below lists expense estimates taken from the company's 2008 budget:

Admnistration                                                             $166,000

Amortization -                                                            $124,000

Production Equipment Direct Labour                                  $530,250

Direct Materials                                                              $120,000

Equipment Maintenance                                                  $228,000

Eadory thities                                                               $49,000

Operatim Suppies                                                             561,850

Production Supervisor                                                        $61,400

Seling Costs                                                                      $56,000

Outbound Shipplig Costs                                                       $108,000

Total                                                                               $2,110,500

Required:

Prepare report for the senior management team at Orleans Manufacturing, including the following topics / analysis:

Question 1) Present a table categorizing the above costs in a format which will be appropriate for the analysis required below. Total the costs in each category.

Question 2) Describe what a predetermined overhead rate is and why it is used.

Question 3) Calculate the predetermined overhead rate for 2008 using the functional based approach, and explain how the figure was derived.

Question 4) Your further analysis revealed that three of the overhead cost items (amortization of production equipment, factory utilities and equipment maintenance) are driven mainly by machine hours, while the remaining overhead costs are more closely affiliated with direct labour hours. Present an alternative method of assigning overhead costs. Calculate the predetermined overhead rate(s) using this method, and explain how the figures were derived

Question 5) Explain the differences between the two methods of overhead assignment. Explain how/when each one might be preferred