Reference no: EM131443159

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

	Model based data
	Model A	Model B
Units manufactured per year	30,000	300,000
Direct material and Direct labour costs	$105,000	$1,000,500
Direct labour hours	41,000	401,000
Machine hours	21,000	201,000
Number of production runs or setups (note 1)	40	60
Inspection hours (note 2)	890	1250

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

	Department data
	Department 1	Department 2
Direct labour hours: Model A Model B
	30,500	10,500
	45,500	355,500
Total	76,000	366,000
Machine hours: Model A Model B
	10,500	10,500
	160,500	40,500
Total	171,000	51,000
Total overhead costs	$340,500	$280,500

Table 3 provides a breakdown of the departmental overhead costs, viz. $340,500 and $280,500.

Table 3

	Department data
Overhead costs:	Department 1	Department 2
Total cost of setting up machines. (note 3)	$90,000	$45,000
Inspection costs	70,250	95,250
Power	100,000	70,000
Miscellaneous	80,250	70,250
Total	$340,500	280,500

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.