Wheeler Place (WP) designs and produces automotive parts. In 2017, actual variable manufacturing overhead is $330,080. WP's simple costing system allocates variable manufacturing overhead to its three customers based onmachine-hours and prices its contracts based on full costs. One of its customers has regularly complained of being charged noncompetitive prices, so WP's controller Declan Hunter 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:

			Usage of Cost Drivers by Customer Contract
Department	Cost Driver	Manufacturing Overhead in 2017	Pacific Motors	Holden Motors	Lowell Auto
Design	CAD-design-hours	$ 39,000	110	200	80
Engineering	Engineering-hours	31,080	70	60	240
Production	Machine-hours	260,000	120	2,800	1,080
Total		$ 330,080

Question:

1.	Compute the manufacturing overhead allocated to each customer in 2017 using the simple costing system that uses machine-hours as the allocation base.
2.	Compute the manufacturing overhead allocated to each customer in 2017 using department-based 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 WP use the information available from itsdepartment-by-department analysis of manufacturing overhead costs?
5.	WP'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?

Answer rating: 100% (QA)

1Overhead Allocation Rate based on Machine Hours Total OverheadsTotal Machine Hours 3300801202800108... View the full answer