Auerbach Enterprises Manufacturers Essay

In todays very competitive business environment, it is imperative that organizations learn the most appropriate and effective belt consecrate, particularly, because it guides management in its tasks of harvest-timeion pricing, job liveing, and budgeting. Businesses asshole use the single beau monde-wide method or can opt for the discussion sectional method. Auerbach Enterprises manufactures air conditioners for many makes of both automobiles and trucks. The two main(prenominal) crossroads are MaxiF minor and Alaska. Currently, the company uses a company-wide pre retrieved command processing knock time (OH) rate just is considering using departmental OH judge in the upcoming year. Company-wide OH rates depute expenses across the entire enterprise. This rate is figured by dividing the total address of overhead by cost drivers harsh throughout each department. accord to Schneider (2012), plane section OH rates are work out for each separate department by dividing the total department overhead budgeted by the budgeted amount of common cost drivers within the department (p. 3.3).Moreover, Auerbach Enterprises is trying to make a use as to whether it would be more appropriate to use the company-wide predetermined overhead rates, or whether it would be more appropriate to switch to using departmental overhead rates. As such, this paper will be making calculations to determine the most appropriate overhead costing rate method fit to Brunton (1998) The easiest method is to apply the plant-wide, or blanket rate. Parts are wanted at a proportionate share of indirect be agree to some predetermined stupid. One disadvantage of this method rises when production processes differ significantly for different part.Parts processed in departments that have low overhead expenses are valued and priced proportionately the same as parts produced in departments with high overhead expenses.A second disadvantage is that exclusively parts do not necessarily carry a portion of indirect cost as part of their value because one base is used in the allocation process (p. 22). Further, a determination should be made concerning whether one product is bear upon more than the other by using departmental rates rather than a company-wide rate. figuring of departmental OH rates using auto hours as the cost driver. plane section OH be / Machine Hours = Department OH Rate Radiator parts industry $80,000 /10,000 = 800% Radiator assembly, dyers rocket, and test 100,000 /20,000 = calciferol% Compressor parts fabrication 120,000 /5,000 = 2400% Compressor assembly and test 180,000 /45,000 = 400% lend 480,000 80,000 4100%Computation of company-wide overhead rate using machine hours as the cost driver. Company-wide OH cost = 480,000 get machine hours =80,000 Company-wide OH rate 480,000/80,000 = 6.00AUERBACH ENTERPRISES 4 Computation of the overhead be per batch of MaxiFlow and Alaska assuming (a) The company-wide rate (b) The departmental rates. Maxiflow 6.00 x 116 = 696Alaska 6 x 164 = 984a) MaxiFlow 696/20 = 34.8Alaska 984/20 = 49.2b) MaxiFlow 1246/20 = 62.3Alaska 954/20 = 47.7Departmen MaxiFlow hours Department OH rate Department cost Radiator parts fabrication 28 x 8.00 = $ 224.00 Radiator assembly weld and test 30 x 5.00 =150.00 Compressor parts fabrication 32 x 24.00 = 768.00 Compressor assembly and test 26 x 4.00 = 104.00 Total 116 41.00 1,246.00Department Alaska hours Department OH rate Department cost Radiator parts fabrication 16 x 8.00 = $ 128.00 Radiator assembly weld and test 74 x 5.00 = 370.00 Compressor parts fabrication 8 x 24.00 = 192.00Compressor assembly and test 6 x 4.00 = 264.00 Total 164 41.00 954.00Computation of the OH costs per unit of MaxiFlow and Alaska assuming (a) The company-wide rate & b) departmental rate. MaxiFlow departmental Rate Company-wide Rate rent materials $ 135.00 $ 135.00 Direct agitate $ 75.00 $ 75.00 Overhead 62.30 34.80 Total unit costs 272.30 244.80Alaska Departmental Rate C ompany-wide rate Direct materials $ 110.00 $ 110.00 Direct labor 95.00 95.00 Overhead 47.70 49.20 Total unit costs 252.70 254.20Is one product affected more than the other by use of departmental rates rather than a company-wide rate? Why or why not? Indeed, the ability to remain competitive lies in how well a company implements cost-cutting solutions within its organization. Accordingly, based on the total unit cost, MaxiFlow appears to be affected more than Alaska by using the departmental rate. Using a company-wide OH rate is give suited for an enterprise that manufactures a single product. Since Auerbach has multiple departments and manufacturing sections, a more accurate overhead rate can be calculated using the departmental OH rate method.Additionally, it is very interesting, and no less make that company such as this uses machine hours instead of direct labor as the cost driver to assign overhead cost this, in and of itself strongly arouse that it is a company which the maj ority of its manufacturing is done by machine and not by physical labor. This is verbalised by Novin (1992) in the following excerpt he states Direct labor no daylong may be the most effective base for applying factory overhead costs to various jobs and products. With todays highly automated systems, labor-related costs constitute only a small portion of total manufacturing costs, and overhead costs now correlate more with factors such as machine hours and material quantities. Accordingly, many companies are beginning to identity application bases that better reflect the causes of overhead costs in their unique manufacturing environments (p. 40).Indeed, regardless of whether a company opts to use the company-wide overhead rate, or the departmental overhead rates, the authorization of those various systems, to a large extent, depends on the type of organization that utilizes them. This is expressed by Boer & Jeter (1993), wherein they state, manufacturing cost structures have been changing slowly over time, exactly sufficient variation across industries exists in the extent and nature of the changes to suggest that no single approach to structuring cost accounting systems is likely to be optimal for all industrial organizations or sectors (pp. 5, 61).Inconclusion, Auerbach compiled planning entropy in an attempt to determine if it would be beneficial to change from a company-wide predetermined overhead rate to a departmental overhead rate. This is crucial because choosing the most appropriate rate helps management in the budgeting, job costing, and product pricing process. Essentially, it all amounts to the bottom line of a company choosing the method that provides the most accurate results for its business success.ReferencesBoer, G., & Jeter, D. (1993). Whats new about redbrick manufacturing? empirical evidence on manufacturing cost changes. Journal of counseling invoice Research, 5, 61. Retrieved from http//search.proquest.com/docview/210171196?accou ntid=32521 Brunton, N. M. (1988). Evaluation of overhead allocations. Management Accounting, 70(1), 22. Retrieved from http//search.proquest.com/docview/229737200?accountid=32521 Novin, A. M. (1992). Applying overhead How to find the right bases and rates. Management Accounting, 73(9), 40. Retrieved from http//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.