Q5. How does the “new system” trace the overhead costs of order processing and special components handling to the products? Overhead cost per order (order processing rate) = DM$13800000/65625 =DM$210.29 per order Overhead cost per special component (special component rate) = DM$19500000/325000= DM$60 per special component In order to adapt the new strategy of SEMW, new costing system uses the order processing rate and special component rate to trace the overhead costs of order processing and special components handling to the specific product. In the first formula, the order processing cost which is removed from support related costs of old system is DM13.8 million. The number of orders that the EMW actually filled is 65625 orders. In the second formula, use total special component cost is DM19.5 million and the number of times to call special components is 325000 times. In this way, the support costs of SEMW would be accurately allocated to each order according to the load on the production support departments rather than the number of special components product.
Q6. Using the information in Exhibit 4, calculate the cost of the five orders (A - E) under the “new” costing system. In order to calculate of the five orders under the new system, we need to calculate the cost of order processing and special components. Meanwhile, the cost of order processing is driven by the number of orders and special components cost is driven by the number of times processed. As Q5 shown, the cost of each order processed is $210.29 and the cost of per special processed is $60.00.
The calculation of the five orders (A-E) under the new costing system Table 1:
Base Motor cost
Order processing cost
Special Motor cost
# of different types of special components per motor
Special component cost
a: Total cost = Base motor cost + order processing rate* number of motors ordered + special motor cost* number of types of special components+ special components rate* number of types of special component
# of motors each order
In the new costing system of SEMW, the support-related overhead includes in the cost of base motor and cost of special motor. We calculate the support cost of each order according to the order processing rate and special components rate. As illustrated in the Table 1 above, the cost of order increasing with more types of special components are needed. It is because not only higher cost of manufacturing those special components but also higher cost of spending in calling from special components from inventory or initiate special component production (e.g. design of special components). The increasing of total cost of each order mainly results from the increasing work loading on the production support department. Additionally, as Table 2 shown, more motors in an order would result in less support costs of special components for each motor. Only when base motor cost and special motor cost change, more motors are product in an order. What is more, the order processing cost and special components cost change when more types of special components are needed. Therefore, the more motors are produced in an order, the more profitable it will be. On the other hand, just 74% of the order accepted for production by EMW after the change in strategy was for less than five motors. Thus, the support cost is crucial for managers to decide whether accept the order or not.
7Q. Using the information in Exhibit 2 and 3, calculate the reported costs of the five...
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