April 12, 2015
Auerbach Enterprises is a company that manufactures air conditioners for automobiles and trucks. The company accommodates various makes and models of automobiles and trucks. The design the y use is a very flexible design as to accommodate the various makes and models. The company manufactures two main products which include the Maxiflow and the Alaska. Management at Auerbach has some concerns and would like advice on determining how to allocate costs associated with using a job order costing system. Management is not sure whether to allocate costs department -wide or company-wide.
The purpose of this essay is to provide advice to management on how to allocate costs. This essay will attempt to compute the departmental and company-wide overhead rates using machine hours as the cost driver. This essay will also compute and do an analysis on overhead costs and total costs at company-wide and departmental rates. The information derived from the computations will help management determine if one product is affected more than another by use of departmental rates versus a company-wide rate. Lastly this essay will discuss the why and the why not of one rate compared to the other rate.
Auerbach’s main products are the Maxiflow and the Alaska. The parts that are used for the maxiflow are complex fabricated parts but not many. They are easy to assemble and test. The Alaska uses quite a few standard parts that are rather difficult to assemble and test. Direct materials costs are required by the Maxiflow and they total $135 per unit. Alaska’s direct materials costs requirements are $110 per unit. Maxiflow also requires a direct labor cost of $75 while Alaska requires a direct labor cost of $95.
In order to assign overhead costs to the air conditioners, Auerbach uses machine hours as the cost driver. Auerbach has for the past several...