Reference no: EM13728698

Methods of Overhead Allocation

A manufacturing company, based in Birmingham, makes auto parts for the motor industry. A division of the company makes two engine components, X and Y. Relevant information on the next budget period for these two components are given below:

Productparts	X	Y
Outputinunits:	13,000	15,000
Costperunit:
Directmaterial	£45	£55
Directlabour	£30	£25
Totalmachinehours	2,500	2,300
Numberofproductionruns	65	75
Ordersexecuted	135	145
Numberofshipments	40	35

The two components are similar and are usually produced in production runs of 200 units. The production overhead is currently absorbed by using a machine hour rate, and the total of the production overhead for the period has been analysed as follows:

Overhead	Budgetedcost £	Costdriver
Machinedepartmentcosts	£360,000	machinehours
Set-upcosts	£99,400	Numberofproductionruns
Inspection/Qualitycontrol	£25,900	Numberofproductionruns
Materialhandling	£156,800	Ordersexecuted
Delivery	£26,250	Numberofshipments
	£668,350

Required:

(a) Using the Activity Based Cost information, compare theoverhead cost per unitin £ andthe percentagesof overhead costs for the two parts, X and Y.

(b) Using the number of units to assign overhead costs to the parts, A and Y, (a traditional approach) compare theoverhead cost per unitin £s and the percentages of overhead costs allocated for the two parts.

(c) Using the data available, explain the differences between the unit overhead costs in percentages between (a) and (b) above.

(d) Discuss the advantages and disadvantages of organization aldecentralisation.