Q:
Eagle Company manufactures components for aircraft engines. 2012 direct cost data for Eagle's three largest customers are as given:
Pratt RR Armstrong
Sales (units) 450 1,000 600
Direct Materials $302, 400 $935,000 $420,000
Direct Labor $ 317,250 $ 852,500 $ 450,000
Dire Labor Hours 637,500 1,820,000 900,000
Also in 2012 Eagle Company incurred overhead costs of $2,551,700. Eagle presently uses a traditional volume-based cost allocation method based on direct labor hours.
Required:
On a separate sheet of paper complete questions 1.
Show all supporting computation for credit.
1. Determine the overhead allocation rate using the present traditional volume-based allocation method.
2. Evaluate the total manufacturing cost per unit of each customer (Pratt, RR and Armstrong) using the present allocation method.
Management in the implementation of activity-based costing (ABC) for the allocation of overhead. Given below are the 2012 cost and activities related to the overhead cost drivers.
Cost driver activity
Activity & Cost Driver Overhead Cost Pratt RR Armstrong
Machine set-up (# set-ups) $ 945,000 150 750 600
Assembly(# machine hrs.) $ 858,500 80 225 120
Materials handling (# purchase orders) $ 328,950 64 86 65
Inspections ( # Inspections) $ 419,250 325 1,180 645
3. Evaluate the ABC allocation rate for each of the activities from the ABC information given above.
4. Determine the total manufacturing cost per unit of each customer: Pratt, RR and Armstrong by the BC method of allocating overhead costs.
5. Compare the ABC net cost per unit of each product (Q4) to the volume-based total cost per unit of each product (Q2) and identify for each product if the over-costed or under-costed.
6. Which allocation system do you recommend Eagel Co. use to allocate overhead costs (current or ABC)? How is this method needful to support management decision making?