CHAPTER 11

EXERCISE 11.18
MODMGT2 K32
Arce, Brando C.
01: Allocate the Inspection Costs to each department,
and compute the overhead cost per unit for each
monitor. Overhead rates use direct labor hours.
Fabrication Assembly

Allocation Ratio of
25% 75%
Inspection Hours
Multiply by:Inspection
$480,000 $480,000
Costs

Inspection Cost Allocated $120,000 $360,000

Direct Overhead Cost 720,000 204,000

Total Overhead Costs $840,000 $564,000

Divided by: Direct Labor

72,000 36,000
Hours

Overhead Rate per

$11.67 $15.67
Direct Labor Hours
 Basic Unit Advanced Unit

Fabrication – Overhead $11.67

$11.67
per hour

Multiply: Hours per unit 0.5 $5.835 1.0 $11.67

Assembly– Overhead
$15.67 $15.67
per hour

Multiply: Hours per unit 0.7 10.969 1.25 19.5875

Overhead Cost Per Unit $16.804 $31.25

 02: Compute the overhead cost per unit if manufacturing cells
are created. Which unit overhead cost do you think is more
accurate—the one computed with a departmental structure, or
the one computed using a cell structure? Explain.

Manufacturing Cell Structure

Basic Cell Advanced Cell

Total Overhead Costs $228,000 $720,000

Divide: Total Number of

45,000 28,000
Units

Per Unit $5.07 $30

Which do I think is better?:

Which do you think is better?

more direct tracing

in the process of assigning costs.
03: Note that total overhead costs for the cell
structures are lower. Explain why.

● Inefficiencies present in the allocation procedure (i.e. cost

driver selection)

● The presence of individual cell structures could result to

more efficient inspection procedures, eliminating the need
for a sole department
○ Eliminates added costs from having a separate
department, increase cost savings

● More so, even less inspection costs would be incurred due

to increased efficiency from specialization in actual product
manufacturing.