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Department
Casting/Stamping
Grinding
Machining
Assembly
Total, proposed method
Total, present method
Difference
Hours
21
12
58
35
126
126
(%)
17
10
46
28
First Proposal
Rate (in $)
52.97
48.14
87.52
40.19
55.96
Note: Indicated cost is higher under the proposed methods primarily because a CS- 29 car
of time in the highest machining department and a less-than-average proportion in the low
the "average" product spends 8%, 7%, 24%, 12% and 49% of its time resp
L
21.6
o/h
Total
31.52
53.12
Hours
304
270
1,115
1,689
1,689
First Proposal
(%)
Rate (in $)
18
52.97
16
48.14
66
87.52
55.96
Note: Indicated cost is higher under the proposed methods primarily because spares d
department, and because they spend a higher-than-average proportion of tim
Hours
674
540
2,158
3,372
3,372
(%)
First Proposal
Rate (in $)
20
52.97
16
48.14
64
87.52
55.96
Note: The difference in indicated cost arises for the same reasons as given above for spare
Q2.
The differences between the costs that result from the two proposed methods are n
present method and either proposal. This is because the actual average overhead c
(Exhibit 2) did not differ greatly from the predetermined rates in Exhibit 4.
The machining department costs dominate all three calculations , and the overhead
versus $ 61.50).Of course, whether the same would be true for months other than J
volumes from the normal volume in those other months.
All three of these examples cited show that the present method gives lower cos
However, it should be noted that some products are being overvalued by the pre
there are some products that require a relatively large amount of assembling tim
system, costed at more than their costs under the proposed systems. Although so
that total production costs are not changed by a decision to use five cost centers i
costs of some activities, of necessity some activities will show lowe
other divisions:
First Proposal
Revised Proposal
Total ($)
Rate (in $)
Total ($)
35,701.78
53.12
35,802.88
25,995.60
46.75
25,245.00
188,868.16
86.50
186,667.00
250,565.54
247,714.88
188,697.12
55.96
188,697.12
61,868.42 (33% more)
59,017.76 (31% more)
c. The calculations are shown above. Note that if there is only one cost cen
machine results in a substantial decrease in the cost of custom carburetors and fu
are five cost centers, the purchase of the machine results in significantly less chan
through the custom work department. This is an interesting phenomenon. The pr
accurately what has actually happened to costs. Furthermore, under the single c
department ,(such as the purchase of the machine in custom work) can have reper
departments, and indeed can even affect the cost of products that do not pas
Working Notes
Amount in $
24,499
633,949
81664
658448
6,667
4,508
2,159
1,101,482
633,949
1,735,431
207,724
148,813
58,910
150,262
2,159
152,421
58.67
22.00
80.67
231,926
209,581
22,345
30%
633949
24499
CS 29
Materials
Labour and overhead
Total cost
Units
Cost per unit
Selling price per unit
Profit (+)/ Loss(-) per unit
So price should be increased.
Present method($)
4200
7050.96
11250.96
100
112.51
113
0.49
CS 29
First proposed method($)
4200
8172.86
12372.86
100
123.73
113
-10.73
Hours reqd.
12
7
17
35
635.64
336.98
1487.84
1406.65
3867.11
11867.11
100
118.6711
123.73
113
113
-5.6711 -10.7286