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In question 4-24, regarding the manufacturing overhead cost per year ($4 mil) and the machine hour choices including practical capacity (120,000) and projected near-term usage (80,000), what is likely to happen if demand decreases further and the company continues to recompute its cost-driver rate using the same approach?
Prices will increase due to its cost-plus pricing strategy which will further decrease demand and send them into a death spiral.
In question 4-24, how should the company choose its cost driver rate in order to avoid a death spiral?
- They should use the practical capacity so it will more evenly match the cost of resources provided.
- The company can also calculate the unused capacity and determine other profitable areas to use these remaining resources.
In question 4-30, how is the cost-driver rate computed for the Machining Department?
- Budgeted overhead cost / Machine hours
- $350,000 / 14,000 machine hours = $25.00 /MH
In question 4-30, how is the cost-driver rate computed for the Finishing Department?
- Budgeted overhead / Direct labor cost
- $280,000 / $350,000 = $0.80 / DL$
In question 4-30, when computing the total cost charged to Job #101, how are the Applied overhead costs calculated?
- For the Machining Department, multiply the machine hours (cost driver) for the job by the cost-driver rate.
- 50 hours x $25.00/MH = $1,250
- For the Finishing Department, multiply the direct labor cost by the cost-driver rate.
- $800 x $0.80/DL$ = $640.
In question 4-31, how is the plantwide cost-driver rate computed?
- Plantwide overhead costs / plantwide direct labor hours
- $60,000 / 4000 DLH= $15.00/DLH
In question 4-31, what are the reasons for choosing only one cost-driver rate, or two cost-driver rates?
- Using only one rate is simpler - less costly to implement and audit.
- Two cost-driver rates is potentially more accurate.
In question 4-32, how are the Monthly Support Cost Rates calculated using actual machine hours and overhead costs?
- Monthly overhead costs / Monthly actual machine hours
- $70,000 / 1,350 = $51.85
- $70,000 / 1,400 = $50.00
In question 4-32, what can the company do instead of calculate monthly overhead costs per machine hour?
- They can calculate the support cost-driver rate based on annual data.
- ($70,000 x 12 months) ÷ (1500 MH x 12 months) = $46.67/MH
- If there are multiple cost drivers that contribute to the manufacturing overhead, they may want to use multiple cost-driver rates and/or non-volume-related cost drivers.