Q1.

 

Dowdy company produces 2 models of widgets: model A and model B. Both models consume services of 2 departments in the factory. Model A is more popular in the market place. The company sets market prices by adding a 10% markup to the total cost of production. Table 1 provides the production data for both models.

Table 1

Â	Model based data
Â	Model A	Model B
Units manufactured per year	30,000	300,000
Direct material and Direct labour costs	$105,000	$1,000,500
Direct labour hours	41,000	401,000
Machine hours	21,000	201,000
Number of production runs or setups (note 1)	40	60
Inspection hours (note 2)	890	1250

Note 1: each model is produced in batches. A production run refers to the production of batch in Depts 1 and 2, which involves setting up machines. Dept 1 will have 40 production runs for model A, Dept 2 will also have 40 production runs for model A. The cost of production runs is directly related to the cost of setting up machines in Table 3.

Note 2: Inspection hours are consumed to ensure the quality of products manufactured

 

Table 2 provides information about the 2 production departments utilised by the 2 models.

Table 2

Â	Department data
Â	Department 1	Department 2
Direct labour hours: Model A Model B	Â	Â
	30,500	10,500
	45,500	355,500
Total	76,000	366,000
Â	Â	Â
Machine hours: Model A Model B	Â	Â
	10,500	10,500
	160,500	40,500
Total	171,000	51,000
Â	Â	Â
Total overhead costs	$340,500	$280,500

 

 

 

 

 

Table 3 provides a breakdown of the departmental overhead costs, viz. $340,500 and $280,500.

Table 3

Â	Department data
Overhead costs:	Department 1	Department 2
Total cost of setting up machines. (note 3)	$90,000	$45,000
Inspection costs	70,250	95,250
Power	100,000	70,000
Miscellaneous	80,250	70,250
Total	$340,500	280,500
Â	Â	Â

Note 3: The cost of setting up machines remains the same per set-up (for each batch) regardless of how many units are manufactured in each batch.

 

Required (round off all overhead rates to 2 decimal places). Show all calculations.

1. Compute the plantwide overhead cost rate, using direct labour hours as the cost driver (or activity base). (2 marks)

 

2. Apply the rate in (1) to models A and B. Calculate the amount of overhead allocated to each unit of models A and B. (3 marks)

 

3. Calculate departmental overhead cost rates: use machine hours for Dept 1, and labour hours for Dept 2. (2 marks)

 

4. Apply these rates in (3) to models A and B. Calculate the amount of overhead allocated to each unit of models A and B. (8 marks)

5. Compare the overhead allocation methods under 1 and 3 for each model. Clearly explain (by referring back to the case facts) the differences in allocated costs with respect to each model. This part requires a narration that explains any figures calculated to highlight differences in allocated amounts: students cannot just provide calculations without providing a detailed explanation. 143