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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 Computation of the Department Overheads Costs per Batch of Product MaxiFlow:
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
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…
Reference
Martin, J.R. (2010). Management Accounting: Concepts, Techniques & Controversial Issues. Accounting and Business Journals .
Kinney, M. Raiborn, C. (2008). Cost Accounting: Foundations and Evolutions. Cengage Learning.
Auerbach Enterprises (nd). CASE 3A -- Auerbach Enterprises.
Ayers (2000, p. 4) describes a supply chain as "Life cycle processes supporting physical, information, financial, and knowledge flows for moving products and services from suppliers to end-users." A supply chain can be short, as in the case of a cottage industry, or quite long and complex as in the manufacture, distribution, and sales of automobiles. In fact, the automobile supply chain has its origin in the mining of the