Managerial Accounting

1. The overhead allocation rate used in the 1987 model year strategy study at the Automotive Component & Fabrication Plant (ACF) was 435% of direct labor dollar cost. Calculated the overhead allocation rate using the 1987 model year budget. Calculate the overhead allocation rate for each of the model years 1988 through 1990. Are the changes since 1987 in overhead allocation rates significant? Why have these changes occurred?

Solution:
Based on the given info we calculate Overhead Allocation Rate =Overhead for PeriodAllocation Base for Period for each allocation bases vis. Sales, Direct Material and Direct Labor

Year | 1987 | 1988 | 1989 | 1990 | Sales | $330,154 | $351,071 | $216,338 | $226,542 | Direct Material | $122,365 | $127,363 | $66,956 | $69,546 | Direct Labor | $24,682 | $25,294 | $13,537 | $14,102 | Overhead for Period | $107,954 | $109,890 | $78,157 | $79,393 | Overhead Allocation Rates | Overhead / Sales (%) | 32.70 | 31.30 | 36.13 | 35.05 | Overhead / Direct Material (%) | 88.22 | 86.28 | 116.73 | 114.16 | Overhead / Direct Labor (%) | 437.38 | 434.45 | 577.36 | 562.99 |
(Amounts are in $ 000)
As we can see there wasn’t a significant change in Overhead Allocation Rate in 1988; however, there was a significant change in 1989 and 1990. The reason for the change is the significant decrease in the Direct Material and Direct Labor costs as compared to Overhead costs. This can be tied to the changes in operations done by ACF. At the end of the 1988 model year, oil pans and muffler-exhaust systems were outsourced from the ACF. This resulted in a loss of 60 labor jobs and 30 indirect jobs.

2. Consider two products in the same product line:

| Product 1 | Product 2 | Expected Selling Price | $62 | $54 | Standard Material Cost | $16 | $27 | Standard Labor Cost | $6 | $3 |

Calculate the expected gross margin as a percentage of selling price on each product based on the 1988 and 1990 model year