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Cost Assignment and JIT
Bunker Company produces two types of glucose monitors (basic and advanced). Both pass through two producing departments: Fabrication and Assembly. Bunker also has an Inspection Department that is responsible for testing monitors to ensure that they perform within prespecified tolerance ranges (a sampling procedure is used). Budgeted data for the three departments are as follows:
| Inspection | Fabrication | Assembly | |
| Overhead | $640,000 | $960,000 | $272,000 |
| Number of tests | — | 40,000 | 120,000 |
| Direct labor hours | — | 96,000 | 48,000 |
In the Fabrication Department, the basic model requires 1.3 hour(s) of direct labor and the advanced model requires 2.6 hour(s). In the Assembly Department, the basic model requires 1.5 hour(s) of direct labor and the advanced model requires 2.85 hours. There are 60,000 basic units produced and 32,000 advanced units.
Immediately after preparing the budgeted data, a consultant suggests that two manufacturing cells be created: one for the manufacture of the basic model and the other for the manufacture of the advanced model. Raw materials would be delivered to each cell, and goods would be shipped immediately to customers upon completion. Workers within each cell would also be trained to perform monitor testing. The total direct overhead costs estimated for each cell would be $304,000 for the basic cell and $960,000 for the advanced cell.
Required 1. Allocate the inspection costs to each department. Fabrication Assembly Compute the overhead cost per unit for each monitor. Overhead rates use direct labor hours. Round your intermediate calculations and final answers to the nearest cent Basic Advanced 2. Compute the overhead cost per unit if manufacturing cells are created. If required, round your intermediate calculations and final answers to the nearest cent. Basic Advanced Which unit overhead cost do you think is more accurate-the one computed with a departmental structure, or the one computed using a cell structure? Cell structure 480000 per unit per unit 5.07 per unit 30 per unit
Expert Answer
| 1) | |||
| Allocation Ratio based on number of tests | Fabrication | Assembly | Total |
| Number of tests | 40000 | 120000 | 160000 |
| Allocation Ratio = 40,000/160,000 ; 120000/160000 | 0.25 | 0.75 | 1 |
| Fabrication | Assembly | ||
| Maintenance:(Inspection $640,000 allocated into 25% and 75%) | $160,000 | $480,000 | |
| Overhead | $960,000 | $272,000 | |
| Total | $1,120,000 | $752,000 | |
| Overhead rate (based on direct labor hours for each department) | |||
| Fabrication = $1,120,000/96,000 | $11.67 | per direct labor hour | |
| Assembly = $752,000/48,000 | $15.67 | per direct labor hour | |
| Overhead Cost per unit | |||
| Basic: ($11.67 × 1.3 hrs) + ($15.67 × 1.5 hrs) = | $38.67 | ||
| Advanced: ($11.67 × 2.6 hrs) + ($15.67 × 2.85 hrs) = | $74.98 | ||
| 2) | |||
| Basic = $304,000/60,000 units | $5.07 | per unit | |
| Advanced = $960,000/32000 units | $30 | per unit | |
| 3) | |||
| Cell structure |
