Automotive Products (AP) designs and produces automotive parts.

In 2017, 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:

Manufacturing Usage of cost drivers by customer contract

Deparment Cost Driver overhead 2017 United Motors Holden Motors Leland Auto
Design CAD design hours $ 39,000 110 200 80
Production Engineering hours $ 29,600 70 60 240
Engineering Machine hours $ 240,000 120 2,800 1,080
Total $ 308,600

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?
Total OAR
390 100
370 80
4,000 60

Cost Total CAB OAR

Simple costing $ 308,600 4,000 77.15

ABC

CAD design hours $ 39,000 390 100

Engineering hours $ 29,600 370 80

Machine hours $ 240,000 4,000 60

Total costs
United Motors Holden Motors Leland Auto

9,258 216,020 83,322

11,000 20,000 8,000

5,600 4,800 19,200

7,200 168,000 64,800

23,800 192,800 92,000

 Cost Total CAB OAR
Simple costing $ 1,800,000 90,000 20
ABC
Output unit level Direct labor costs $ 276,000
Facility sustaining costs Equipment- related costs $ 495,000 90,000 5.5
Batch level Setup costs $ 630,000 21,000 30
Product sustaining costs Costs of designing tests $ 399,000 6,000 66.5
Total costs $ 1,800,000
 HT ST
1,000,000 800,000

204,000 72,000
275,000 220,000
450,000 180,000
266,000 133,000
$ 1,195,000 $ 605,000
ABC Cost driver Cost Total CAB
DM
DL
MOH
Machining costs Machine hours $ 720,000 40,000 80,000 120,000
Setup costs Number of production runs $ 150,000 60 60 120
Inspection costs Inspection hours $ 135,000 1,500 750 2,250
Total costs $ 1,005,000
Number of unit
MC per calculator
 OAR Mathematical Financial
$ 240,000 $ 480,000
$ 75,000 $ 150,000

$ 6.00 $ 240,000 $ 480,000

$ 1,250.00 $ 75,000 $ 75,000
$ 60.00 $ 90,000 $ 45,000
$ 720,000 $ 1,230,000
60,000 120,000
$ 12.0 $ 10.3
 CAB
Cost driver Cost Standard
Number of printing jobs
Price per job
Cost of supplies per job (DM)
DL costs per job
Printing machine-hours per job
Setup-hours per job
Simple costing
DM
DL
MOH Machine hours $ 201,500 4,000
Total costs
Cost per unit

ABC
DM
DL
MOH
Printing costs Machine hours $ 75,000 4,000
Setup costs Setup-hours $ 45,000 1,600
Purchase order costs number of purchase orders $ 18,000 400
Design costs $ 20,000
Marketing costs 5% of sale revenues $ 19,500
Administration costs Direct labor costs $ 24,000 36,000
Total costs $ 201,500
Cost per unit
 CAB
Special Total OAR Standard Job Spectial Job
400 200
$ 600 $ 750
$ 100 $ 125
$ 90 $ 100
10 10
4 7

$ 40,000 $ 25,000
$ 36,000 $ 20,000
2,000 6,000 $ 33.58 $ 134,333 $ 67,167
$ 210,333 $ 112,167
$ 525.83 $ 560.83

$ 40,000 $ 25,000
$ 36,000 $ 20,000

2,000 6,000 $ 12.50 $ 50,000 $ 25,000

1,400 3,000 $ 15.00 $ 24,000 $ 21,000
500 900 $ 20.00 $ 8,000 $ 10,000
$ 4,000 $ 16,000
$ 12,000 $ 7,500
20,000 56,000 $ 0.43 $ 15,429 $ 8,571
$ 189,429 $ 133,071
$ 473.6 $ 665.4
 CAB
Cost driver Cost Interior
Unit sold
Selling price
DM costs per unit
DL costs per hour
DL hours per unit

Simple costing
DM
DL
MOH Machine hours $ 255,800 5,500
Total costs
Cost per unit

ABC
DM
DL
MOH
Production scheduling Production runs $ 95,000 40
Material handling Material moves $ 45,000 72
Machine setup Machine setups $ 25,000 45
Assembly Machine hours $ 60,000 5,500
Inspection Number of inspections $ 8,000 250
Marketing costs 3% of sale revenues $ 22,800
Total costs $ 255,800
Cost per unit
 CAB
Exterior Total OAR Interior Exterior
3,200 1,800
$ 125 $ 200
$ 30 $ 45
$ 16 $ 16
1.5 2.25

$ 96,000 $ 81,000
$ 76,800 $ 64,800
4,500 10,000 $ 25.58 $ 140,690 $ 115,110
$ 313,490 $ 260,910
$ 97.97 $ 144.95

$ 96,000 $ 81,000
$ 76,800 $ 64,800

85 125 $ 760.00 $ 30,400 $ 64,600

168 240 $ 187.50 $ 13,500 $ 31,500
155 200 $ 125.00 $ 5,625 $ 19,375
4,500 10,000 $ 6.00 $ 33,000 $ 27,000
150 400 $ 20.00 $ 5,000 $ 3,000
$ 12,000 $ 10,800
$ 272,325 $ 302,075
$ 85.1 $ 167.8