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 Maxi Flow and Alaska. Maxi Flow 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. Maxi Flow 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 Maxi Flow 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:

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:

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 Maxi Flow and Alaska assuming:

     (a) The company-wide rate.

    (b) The departmental rates.

4. Compute the total costs per unit of Maxi Flow 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?