Managerial Recommendation for Auerbach Enterprises

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.