Auerbach Enterprises Manufacturers

Topics: Cost accounting, Management accounting, Costs Pages: 8 (1173 words) Published: February 28, 2015

Auerbach Enterprises Manufacturers
Moses Parker
BUS 630: Managerial Accounting
Prof. Brian Shaw
February 24, 2015

AUERBACH ENTERPRISES 2 Auerbch Enterprises Manufacturers
In today’s very competitive business environment, it is imperative that organizations choose the most appropriate and effective overhead rate, particularly, because it guides management in its tasks of product pricing, job costing, and budgeting. Businesses can use the single company-wide method or can opt for the departmental method. Auerbach Enterprises manufactures air conditioners for many makes of both automobiles and trucks. The two main products are MaxiFlow and Alaska. Currently, the company uses a company-wide predetermined overhead (OH) rate but is considering using departmental OH rates in the upcoming year. Company-wide OH rates allocate expenses across the entire enterprise. This rate is figured by dividing the total cost of overhead by cost drivers common throughout each department. According to Schneider (2012), “Department OH rates are calculated for each separate department by dividing the total department overhead budgeted by the budgeted amount of common cost drivers within the department” (p. 3.3). Moreover, Auerbach Enterprises is trying to make a determination as to whether it would be more appropriate to use the company-wide predetermined overhead rates, or whether it would be more appropriate to switch to using departmental overhead rates. As such, this paper will be making calculations to determine the most appropriate overhead costing rate method; according to Brunton (1998): The easiest method is to apply the plant-wide, or blanket rate. Parts are valued at a proportionate share of indirect costs according to some predetermined base. One disadvantage of this method rises when production processes differ significantly for different parts. Parts processed in departments that have low overhead expenses are AUERBACH ENTERPRISES 3 valued and priced proportionately the same as parts produced in departments with high overhead expenses. A second disadvantage is that all parts do not necessarily carry a portion of indirect cost as part of their value because one base is used in the allocation process (p. 22). Further, a determination should be made concerning whether one product is affected more than the other by using departmental rates rather than a company-wide rate. Computation of departmental OH rates using machine hours as the cost driver. Department OH Costs / Machine Hours = Department OH Rate Radiator parts fabrication $80,000 /10,000 = 800% Radiator assembly, weld, and test 100,000 /20,000 = 500% Compressor parts fabrication 120,000 /5,000 = 2400% Compressor assembly and test 180,000 /45,000 = 400% Total 480,000 80,000 4100%

Computation of company-wide overhead rate using machine hours as the cost driver. Company-wide OH cost = 480,000 Total machine hours =80,000 Company-wide OH rate 480,000/80,000 = 6.00

AUERBACH ENTERPRISES 4 Computation of the overhead costs per batch of MaxiFlow and Alaska assuming: (a) The company-wide rate (b) The departmental rates. Maxiflow 6.00 x 116 = 696Alaska 6...

References: Boer, G., & Jeter, D. (1993). What 's new about modern manufacturing? empirical evidence on manufacturing cost changes. Journal of Management Accounting Research, 5, 61. Retrieved from
Brunton, N. M. (1988). Evaluation of overhead allocations. Management Accounting, 70(1), 22. Retrieved from
Novin, A. M. (1992). Applying overhead: How to find the right bases and rates. Management Accounting, 73(9), 40. Retrieved from
Schneider, A. (2012). Managerial Accounting: Decision Making for the Service and
Manufacturing Sectors. Bridgepoint Education: San Diego, CA.
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