Costs and Departmental Overhead Rates

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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:
Overhead Machine
Costs Hours
Radiator parts fabrication.............. $ 80,000 10,000 Radiator assembly, weld, and test.... 100,000 20,000 Compressor parts fabrication.......... 120,000 5,000 Compressor assembly and test........ 180,000 45,000 Total $480,000 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 Alaska
Radiator parts fabrication........... 28 16
Radiator assembly, weld, and test....... 30 74 Compressor parts fabrication......... 32...
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