Order Description
Q1.
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 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 marks)
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 marks)
3. Calculate departmental overhead cost rates: use machine hours for Dept 1, and labour hours for Dept 2. (2 marks)
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. (8 marks)
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.(10 marks)
Total: 25 marks