Auerbach Enterprises Manufacturers Essay

In today’s really competitory concern environment. it is imperative that organisations choose the most appropriate and effectual operating expense rate. peculiarly. because it guides direction in its undertakings of merchandise pricing. occupation bing. and budgeting. Businesss can utilize the individual company-wide method or can choose for the departmental method. Auerbach Enterprises manufactures air conditioners for many makes of both cars and trucks. The two chief merchandises are MaxiFlow and Alaska. Currently. the company uses a company-wide predetermined operating expense ( OH ) rate but is sing utilizing departmental OH rates in the approaching twelvemonth. Company-wide OH rates allocate disbursals across the full endeavor. This rate is figured by spliting the entire cost of operating expense by cost drivers common throughout each section. Harmonizing to Schneider ( 2012 ) . “Department OH rates are calculated for each separate section by spliting the entire section operating expense budgeted by the budgeted sum of common cost drivers within the department” ( p. 3. 3 ) .

Furthermore. Auerbach Enterprises is seeking to do a finding as to whether it would be more appropriate to utilize the company-wide predetermined overhead rates. or whether it would be more appropriate to exchange to utilizing departmental overhead rates. As such. this paper will be doing computations to find the most appropriate overhead bing rate method ; harmonizing to Brunton ( 1998 ) : The easiest method is to use the plant-wide. or cover rate. Partss are valued at a proportionate portion of indirect costs harmonizing to some preset base. One disadvantage of this method rises when production processes differ significantly for different parts. Partss processed in sections that have low operating expense disbursals are valued and priced proportionally the same as parts produced in sections with high operating expense disbursals.

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A 2nd disadvantage is that all parts do non needfully transport a part of indirect cost as portion of their value because one base is used in the allotment procedure ( p. 22 ) . Further. a finding should be made refering whether one merchandise is affected more than the other by utilizing departmental rates instead than a company-wide rate. Calculation of departmental OH rates utilizing machine hours as the cost driver. Department OH Costs / Machine Hours = Department OH Rate Radiator parts fabrication $ 80. 000 /10. 000 = 800 % Radiator assembly. dyer’s rocket. and test 100. 000 /20. 000 = 500 % Compressor parts fiction 120. 000 /5. 000 = 2400 % Compressor assembly and trial 180. 000 /45. 000 = 400 % Entire 480. 000 80. 000 4100 %

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Calculation of company-wide overhead rate utilizing machine hours as the cost driver. Company-wide OH cost = 480. 000 Entire machine hours =80. 000 Company-wide OH rate 480. 000/80. 000 = 6. 00

AUERBACH ENTERPRISES 4 Computation of the operating expense costs per batch of MaxiFlow and Alaska assuming: ( a ) The company-wide rate ( B ) The departmental rates. Maxiflow 6. 00 ten 116 = 696Alaska 6 ten 164 = 984

a ) MaxiFlow 696/20 = 34. 8Alaska 984/20 = 49. 2
B ) MaxiFlow 1246/20 = 62. 3Alaska 954/20 = 47. 7
Departmen MaxiFlow hours Department OH rate Department cost Radiator parts fiction 28 ten 8. 00 = $ 224. 00 Radiator assembly weld and test 30 x 5. 00 =
150. 00 Compressor parts fiction 32 ten 24. 00 = 768. 00 Compressor assembly and trial 26 ten 4. 00 = 104. 00 Entire 116 41. 00 1. 246. 00

Department Alaska hours Department OH rate Department cost Radiator parts fiction 16 ten 8. 00 = $ 128. 00 Radiator assembly weld and test 74 x 5. 00 = 370. 00 Compressor parts fiction 8 ten 24. 00 = 192. 00

Compressor assembly and trial 6 ten 4. 00 = 264. 00 Entire 164 41. 00 954. 00

Calculation of the OH costs per unit of MaxiFlow and Alaska assuming: ( a ) The company-wide rate & A ; B ) departmental rate. MaxiFlow Departmental Rate Company-wide Rate Direct stuffs $ 135. 00 $ 135. 00 Direct labour $ 75. 00 $ 75. 00 Overhead 62. 30 34. 80 Entire unit costs 272. 30 244. 80

Alaska Departmental Rate Company-wide rate Direct stuffs $ 110. 00 $ 110. 00 Direct labour 95. 00 95. 00 Overhead 47. 70 49. 20 Entire unit costs 252. 70 254. 20

Is one merchandise affected more than the other by usage of departmental rates instead than a company-wide rate? Why or why non? Indeed. the ability to stay competitory prevarications in how good a company implements cost-cutting solutions within its organisation. Accordingly. based on the entire unit cost. MaxiFlow appears to be affected more than Alaska by utilizing the departmental rate. Using a company-wide OH rate is better suited for an endeavor that manufactures a individual merchandise. Since Auerbach has multiple sections and fabrication subdivisions. a more accurate overhead rate can be calculated utilizing the departmental OH rate method.

Additionally. it is really interesting. and no less obliging that company such as this uses machine hours alternatively of direct labour as the cost driver to delegate overhead cost ; this. in and of itself strongly suggest that it is a company which the bulk of its fabrication is done by machine and non by physical labour. This is expressed by Novin ( 1992 ) in the undermentioned extract ; he states: Direct labour no longer may be the most effectual base for using mill operating expense costs to assorted occupations and merchandises. With today’s extremely machine-controlled systems. labor-related costs constitute merely a little part of entire fabrication costs. and overhead costs now correlate more with factors such as machine hours and material measures. Consequently. many companies are get downing to identity application bases that better reflect the causes of overhead costs in their alone fabrication environments ( p. 40 ) .

Indeed. regardless of whether a company opts to utilize the company-wide overhead rate. or the departmental overhead rates. the effectivity of those assorted systems. to a big extent. depends on the type of organisation that utilizes them. This is expressed by Boer & A ; Jeter ( 1993 ) . wherein they province. “…manufacturing cost constructions have been altering easy over clip. but sufficient fluctuation across industries exists in the extent and nature of the alterations to propose that no individual attack to structuring cost accounting systems is likely to be optimum for all industrial organisations or sectors” ( pp. 5. 61 ) .

In decision. Auerbach compiled be aftering information in an effort to find if it would be good to alter from a company-wide preset operating expense rate to a departmental overhead rate. This is of import because taking the most appropriate rate helps direction in the budgeting. occupation bing. and merchandise pricing procedure. Basically. it all sums to the bottom line of a company taking the method that provides the most accurate consequences for its concern success.


Boer. G. . & A ; Jeter. D. ( 1993 ) . What’s new about modern fabrication? empirical grounds on fabricating cost alterations. Journal of Management Accounting Research. 5. 61. Retrieved from hypertext transfer protocol: //search. proquest. com/docview/210171196? accountid=32521 Brunton. N. M. ( 1988 ) . Evaluation of overhead allotments. Management Accounting. 70 ( 1 ) . 22. Retrieved from hypertext transfer protocol: //search. proquest. com/docview/229737200? accountid=32521 Novin. A. M. ( 1992 ) . Using overhead: How to happen the right bases and rates. Management Accounting. 73 ( 9 ) . 40. Retrieved from hypertext transfer protocol: //search. proquest. com/docview/229742735? accountid=32521 Schneider. A. ( 2012 ) . Managerial Accounting: Decision Making for the Service and Manufacturing Sectors. Bridgepoint Education: San Diego. CA.

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