managerial accounting 109

Auerbach Enterprises manufactures air conditioners for automobiles and trucks manufactured throughout 

North America. The company designs its products with flexibility to accommodate many makes and 

models of automobiles and trucks. The company’s two main products are MaxiFlow and Alaska. 

MaxiFlow uses a few complex fabricated parts, but these have been found easy to assemble and test. 

On the other hand, Alaska uses many standard parts but has a complex assembly and testing process. 

MaxiFlow requires direct materials costs which total $135 per unit, while Alaska’s direct materials 

requirements total $110 per unit. Direct labor costs per unit are $75 for MaxiFlow and $95 for Alaska. 

 

Auerbach Enterprises uses machine hours as the cost driver to assign overhead costs to the air 

conditioners. The company has used a company wide predetermined overhead rate in past years, but 

the new controller, Bennie Leon, is considering the use of departmental overhead rates beginning with 

the next year. 

 

The following planning information is available for the next year for each the four manufacturing 

departments within the company: 

 

 Overhead Machine 

 Costs Hours 

Radiator parts fabrication………….. $ 80,000 10,000 

Radiator assembly, weld, and test…. 100,000 20,000 

Compressor parts fabrication………. 120,000 5,000 

Compressor assembly and test…….. 180,000 45,000 

 Total $480,000 80,000 

 

Normally, the air conditioners are produced in batch sizes of 20 at a time. A production batch of 20 units 

requires the following number of hours in each department: 

 

 MaxiFlow Alaska 

Radiator parts fabrication……….. 28 16 

Radiator assembly, weld, and test……. 30 74 

Compressor parts fabrication……… 32 8 

Compressor assembly and test……… 26 66 

 Total 116 164 

 

Required: 

1. Compute the departmental overhead rates using machine hours as the cost driver. 

2. Compute a company wide overhead rate using machine hours as the cost driver. 

3. Compute the overhead costs per batch of MaxiFlow and Alaska assuming: 

 (a) The company wide rate. 

 (b) The departmental rates. 

4. Compute the total costs per unit of MaxiFlow and Alaska assuming: 

 (a) The company wide rate. 

 (b) The departmental rates. 

5. Is one product affected more than the other by use of departmental rates rather than a company wide 

rate? Why or why not? 

 

FURTHER INSTRUCTIONS: 

 

In this case, you are provided the overhead cost data for the Auerbach Enterprises.  Management needs advice in determining how to allocate these costs utilizing a job order costing system either department wide or company wide.   Address Questions 1through 5 located at the end of the case.  Based on the case questions, you are required to provide a five PAGE double spaced written report addressing management’s concerns and providing recommendations.  The written report should be properlyformatted according to APA guidelines and demonstrate research and critical thinking skills.  Conclusions and recommendations should be supported by at least 2 scholarly sources from A Library or other external sources. 

 

For Questions 1 through 4, you will need to complete several calculations. Be sure to label and clearly identify your work to demonstrate your understanding of the concept .  The calculations should be included as part of your analysis and written recommendations required for submission. 

 

For Question 5, fully address management’s concerns as part of your written analysis and recommendation using the new or the previous calculations to support your recommendation/explanation.  The written analysis should be supported by at least 2 scholarly sources, excluding the textbook.

Week 2 Written Assignment should:

• Demonstrate graduate level work including appropriate research and critical thinking skills.
• Be presented as a written analysis (not a question/answer format).
• Incorporate case questions into the overall analysis.
• Follow APA formatting guidelines including title page, reference page and in text citations.
• Consists of  five double spaced pages of content.
• Provide at least 3 scholarly sources, excluding the textbook.