Plantwide department and ABC indirect cost rates. Automotive Products (AP) designs and produces automotive parts. In 2009, actual variable manufacturing overhead is $308,600. AP’s simple costing system allocates variable manufacturing overhead to its three customers based on machine-hours and prices its contracts based on full costs. One of its customers has regularly complained of being charged noncompetitive prices, so AP’s controller Devon Smith realizes that it is time to examine the consumption of overhead resources more closely. He knows that there are three main departments that consume overhead resources: design, production, and engineering. Interviews with the department personnel and examination of time records yield the following detailed information:

If you want to use Excel to solve this exercise, go to the Excel Lab at www.prenhall.com/horngren/cost13e and download the template for Exercise 5-19.

1. Compute the variable manufacturing overhead allocated to each customer in 2009 using the simple costing system that has machine-hours as the allocation base.

2. Compute the variable manufacturing overhead allocated to each customer in 2009 using department- based variable manufacturing overhead rates.

3. Comment on your answers in requirements 1 and 2. Which customer do you think was complaining about being overcharged in the simple system? If the new department-based rates are used to price contracts, which customer (s) will be unhappy? How would you respond to these concerns?

4. How else might AP use the information available from its department-by-department analysis of variable manufacturing overhead costs?

5. AP’s managers are wondering if they should further refine the department-by-department costing system into an ABC system by identifying different activities within each department. Under what conditions would it not be worthwhile to further refine the department costing system into an ABC system?

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Usage of Cost Drivers by Customer Variable Manufacturing Overhead in 2009 $ 39,000 29,600 Contract Holden Motors Leland United Cost Driver CAD-design hours Engineering hours Machine hours Motors 110 Vehicle 80 Department 3 Design 4 Production 5 Engineering 200 60 2,800 70 120 240 1,080 240,000 $308,600 6 Total