Compute a company-wide overhead rate using machine hours as the cost driver.

CASE 3A – AUERBACH ENTERPRISES
Auerbach Enterprises manufactures air conditioners for automobiles and trucks manufactured throughout
North America. The company designs its products with flexibility to accommodate many makes and
models of automobiles and trucks. The company’s two main products are MaxiFlow and Alaska.
MaxiFlow uses a few complex fabricated parts, but these have been found easy to assemble and test.
On the other hand, Alaska uses many standard parts but has a complex assembly and testing process.
MaxiFlow requires direct materials costs which total \$135 per unit, while Alaska’s direct materials
requirements total \$110 per unit. Direct labor costs per unit are \$75 for MaxiFlow and \$95 for Alaska.
Auerbach Enterprises uses machine hours as the cost driver to assign overhead costs to the air
conditioners. The company has used a company-wide predetermined overhead rate in past years, but
the new controller, Bennie Leon, is considering the use of departmental overhead rates beginning with
the next year.
The following planning information is available for the next year for each the four manufacturing
departments within the company:
Costs
\$ 80,000
100,000
Compressor parts fabrication……….
120,000
Compressor assembly and test……..
180,000
Total
\$480,000 Machine
Hours
10,000
20,000
5,000
45,000
80,000 Normally, the air conditioners are produced in batch sizes of 20 at a time. A production batch of 20 units
requires the following number of hours in each department:
MaxiFlow
28
30
Compressor parts fabrication………
32
Compressor assembly and test………
26
Total
16
74
8
66
164 Required:
1. Compute the departmental overhead rates using machine hours as the cost driver.
2. Compute a company-wide overhead rate using machine hours as the cost driver.
3. Compute the overhead costs per batch of MaxiFlow and Alaska assuming:
(a) The company-wide rate.
(b) The departmental rates.
4. Compute the total costs per unit of MaxiFlow and Alaska assuming:
(a) The company-wide rate.
(b) The departmental rates.
5. Is one product affected more than the other by use of departmental rates rather than a company-wide
rate? Why or why not?

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