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Bunker Company produces two types of glucose monitors (basic and advanced). Both pass through two producing departments: Fabrication and Assembly. Bunker also has an Inspection Department that is responsible for testing monitors to ensure that they perform within prespecified tolerance ranges (a sampling procedure is used). Budgeted data for the three departments are as follows: In the Fabrication Department, the basic model requires 0.5 hour of direct labor and the advanced model requires 1.0 hour. In the Assembly Department, the basic model requires 0.7 hour of direct labor and the advanced model requires 1.25 hours. There are 45,000 basic units produced and 24,000 advanced units. Immediately after preparing the budgeted data, a consultant suggests that two manufacturing cells be created: one for the manufacture of the basic model and the other for the manufacture of the advanced model. Raw materials would be delivered to each cell, and goods would be shipped immediately to customers upon completion. Workers within each cell would also be trained to perform monitor testing. The total direct overhead costs estimated for each cell would be $228,000 for the basic cell and $720,000 for the advanced cell. Required: 1. Allocate the inspection costs to each department, and compute the overhead cost per unit for each monitor. (Overhead rates use direct labor hours.) 2. 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. 3. Note that the total overhead costs for the cell structure are lower. Explain why.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 11, Problem 18E
Textbook Problem
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Bunker Company produces two types of glucose monitors (basic and advanced). Both pass through two producing departments: Fabrication and Assembly. Bunker also has an Inspection Department that is responsible for testing monitors to ensure that they perform within prespecified tolerance ranges (a sampling procedure is used). Budgeted data for the three departments are as follows:

Chapter 11, Problem 18E, Bunker Company produces two types of glucose monitors (basic and advanced). Both pass through two

In the Fabrication Department, the basic model requires 0.5 hour of direct labor and the advanced model requires 1.0 hour. In the Assembly Department, the basic model requires 0.7 hour of direct labor and the advanced model requires 1.25 hours. There are 45,000 basic units produced and 24,000 advanced units.

Immediately after preparing the budgeted data, a consultant suggests that two manufacturing cells be created: one for the manufacture of the basic model and the other for the manufacture of the advanced model. Raw materials would be delivered to each cell, and goods would be shipped immediately to customers upon completion. Workers within each cell would also be trained to perform monitor testing. The total direct overhead costs estimated for each cell would be $228,000 for the basic cell and $720,000 for the advanced cell.

Required:

  1. 1. Allocate the inspection costs to each department, and compute the overhead cost per unit for each monitor. (Overhead rates use direct labor hours.)
  2. 2. 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.
  3. 3. Note that the total overhead costs for the cell structure are lower. Explain why.

1.

To determine

Assign the inspection cost to each department and calculate the overhead cost per unit for both the monitors.

Explanation of Solution

Allocation of inspection cost.

ParticularsFabricationAssembly
Allocation ratio0.250.75
Maintenance:  
0.25 × $480,000$120,000 
0.75 × $480,000 $360,000
Direct overhead cost720,000204,000
Total$840,000$564,000

Table (1)

Note: Allocation is based on the number of tests.

Calculate the overhead rate for fabrication department (based on direct labor hours of departments).

Overhead rate= Allocation cost[refer table(1)]Direct labor hours=$840,00072,000=$11.67(rounded) per direct labor hour

Calculate the overhead rate for assembly department (based on direct labor hours of departments).

Overhead rate= Allocation cost[refer table(1)]Direct labor hours=$564,00036,000=$15.67(rounded) per direct labor hour

Calculate the unit cost for the basic monitor

2.

To determine

Calculate the overhead cost per unit if manufacturing cells are created and explain the suitable unit overhead cost is more accurate.

3.

To determine

Explain the reason for total overhead cost is low in the cell structure.

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Cornerstones of Cost Management (Cornerstones Series)
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