Auerbach Enterprises is facing challenges in making decision regarding the best option for their overhead rates. Previously, the company was using "company-wide predetermined overhead rates." (Auerbach Enterprises, nd).However, the Auerbach management is considering using the departmental overhead rates starting by next year. Objective of this paper is to use a series of calculation to determine whether the departmental overhead rates accounting principles will be profitable for the company. The first calculation is to determine the departmental overhead rates for the company using machine hours method. The departments will divide the total overhead costs based on the ratio of hours consumed.
Computation of the Departmental overhead rates using the machine hour's method
Department
Overhead costs
Machine Hour
Calculation
Rate
Radiator Part Fabrication
80,000
10,000
80,000 / 10,000
Radiator Weld Assembly, and Test
100,000
20,000
100,000 / 20,000
Compressor parts fabrication
120,000
5,000
120,000 / 5,000
Compressor assembly & Test
180,000
45,000
180,000 / 45,000
Total
480,000
80,000
Based on the outcomes of the calculation, it is revealed that the company department wide rate depends on the number of Machine hours and overhead costs used in that department. From the outcome of the calculation, the "Compressor parts fabrication department" records $24 per hour, which is the highest overhead rate Auerbach Enterprises, nd).
2. Computation of the Company-wide overhead rates using the machine hours method
Company
Overhead cost
Machine Hour
Rate
Auerbach Enterprises
480,000
80,000
6
The company-wide overhead rate is $6, which denotes the overhead rate for the company entirely.
3a. Computation of the Company-wide Overheads Costs per Batch of Product MaxiFlow
Department
Overhead Rate
Machine Hour
Cost
Radiator parts fabrication
6
28
Radiator Assembly, weld & test
6
30
Compressor parts fabrication
6
32
Compressor assembly and test
6
26
Total Overheads Costs
$696
3a. Computation of the Company-wide Overheads Costs per Batch of Product Alaska
Department
Overhead Rate
Machine Hour
Cost
Radiator parts fabrication
6
16
96
Radiator Assembly, weld & test
6
74
Compressor parts fabrication
6
8
48
Compressor assembly and test
6
66
Total Overheads Costs
$984
3b. Computation of the Department Overheads Costs per Batch of Product MaxiFlow:
Department
Overhead Rate
Machine Hour
Cost
Radiator parts fabrication
8
28
Radiator Assembly, weld & test
5
30
Compressor parts fabrication
24
32
Compressor assembly and test
4
26
Total Overheads Costs
$1,246
3b.Computation of the Department Overheads Costs per Batch of Product Alaska
Department
Overhead Rate
Machine Hour
Cost
Radiator parts fabrication
8
16
Radiator Assembly, weld & test
5
74
Compressor parts fabrication
24
8
Compressor assembly and test
4
66
Total Overheads Costs
$954
4a. The Company-wide rate Total Costs per unit of MaxiFlow and Alaska
MaxiFlow/unit
Alaska/unit
Direct materials
$135
$110
Direct labor costs
$75
$95
Radiator Part Fabrication
96
Radiator Assembly Weld & Test
Compressor Part Fabrication
48
Compressor Assembly & Test
Total Cost Per Unit
$906
$1,484
4b. The Departmental -wide rate Total Costs per unit of MaxiFlow and Alaska
MaxiFlow/unit
Alaska/unit
Direct materials
$135
$110
Direct labor costs
$75
$95
Radiator Part Fabrication
Radiator Assembly Weld & Test
Compressor Part Fabrication
Compressor Assembly & Test
Total Cost Per Unit
$1,456
$1,159
5. Product more affected by the Departmental Rates
Based on the outcome of the calculations, it is revealed one product will be more affected by using the Departmental Rates. For example, the computation of the overhead costs using the departmental rates reveals that the Maxiflow overhead costs is greater than the Alaska overhead costs. The overhead cost to produce Maxiflow at departmental rates is $1,246, while the overhead costs of Alaska is $954. Moreover, the total overhead costs to produce both Maxiflow and Alaska at Departmental rates are greater than the total overhead costs at Company -wide. Additionally, the total costs per unit to produce Maxiflow are higher than the total costs per unit to produce Alaska at Departmental wide- rates. Moreover, the overall Cost per Unit to produce the two products at departmental rates is higher than the company-wide. (Kinney Raiborn,2008).
Comparative Analysis of Departmental and Company -wide
Maxiflow
Alaska
Total
Overhead costs
Departmental wide- rates
$1,246
$954
$2,200
Company -wide
$696
$984
$1, 680
Total Cost Per Unit
Departmental-wide rates
$1,456
$1,159
$2,615
Company -wide
$906
$1,484
$2,350
Recommendation
Based on the findings from the overall calculation, it is not advisable for the company to use departmental overhead rates to produce its two products because the company will incur higher costs of production using departmental rates. The costs are very important for the production of goods and services, and organizations that are able to manage costs effectively will record greater annual revenue than organizations that constantly records high costs of production. (Martin, 2010). The paper recommends that the management of Auerbach Enterprises should not use the departmental overhead rates to produce its product because the company will incur higher costs of production using this technique.
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