7/22/2019 170391242-maccounting-bridgeton

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Authors:

Philip Larson

Bridgeton Industries

7/22/2019 170391242-maccounting-bridgeton

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Bridgeton Industries: Automotive Component & Fabrication Plant Philip Larson

1) Are the changes since 1987 in overhead allocation rates significant? Why have these changes occurred?

Equation: Overhead Allocation Rate = overhead for period / allocation base for period

Example Allocation ases: Direct labor dollars, direct labor hours, machine hours, direct material dollars, etc.

Total

Overhe

ad(OH)

Direc

tLabor

Costs

(DLC)

DirectM

aterialCosts

(DMC)

Sales

OH/DLC

OH/DMC

OH/Sales

19! 1"!9#$ %$&% 1%%' ''"1#$ $'!( ( ''(

19 1"99" %#%9$ 1%!'&' '#1"!1 $'$( &( '1(

199 !1#! 1'#'! &&9#& %1&'' #!!( 11!( '&(199" !9'9' 1$1"% &9#$& %%$% #&'( 11$( '#(

The changes in 1!! do not appear significant. "o#ever, the changes in overhead allocation rates in 1! and 1$do appear to be significant #hen compared to 1!% rates. The reason these changes have occurred can be seenbelo#. &ssentiall', bet#een 1!! and 1! total overhead costs decreased at a slo#er pace than direct labor costs,direct material costs and sales. The case stated that at the end of the 1!! model 'ear (oil pans and muffler e)hausts'stems #ere outsourced from the A*+ #hich could help e)plain #h' direct labor costs and material costs #ent do#nfaster than overhead.

!) "alculate the expected gross margins as a percentage of selling price on each product #ased on 1988 and199$ model year #udgets% assuming selling price and material and la#or cost do not change from thisstandard&

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Bridgeton Industries: Automotive Component & Fabrication Plant Philip Larson

Equation: -ross margin = sales revenue cost of goods sold

To find the gross margin, #e must figure out the cost of the goods sold. The cost of the goods sold #ill include thelabor costs, the material costs as #ell as a portion of the overhead costs.

Therefore, the gross margin percentages go do#n significantl' from 1!! to 1$. The reason for this is because theoverhead allocation rates #ent up significantl' maing the overhead costs for each product significantl' higher in 1$than in 1!!.

') (repare an estimated model year #udget for the A" in 1991& What *ill the overhead allocation rates #eunder the t*o scenarios&

Equation: 0tandard cost = e)pected budgeted2 cost for a given period

+cenario 1: 3nder scenario 1, no additional products #ill be dropped in 11 from 1$. Therefore, the change in

overhead allocation rate from 1$ to 11 #ill be similar to the change from 1!% to 1!! another 'ear #here theproduct line did not change significantl'2. The differences in 1!% to 1!! are fairl' negligible. 4f #e assume thatchange in overhead from 1$ to 11 #ill also be negligible because the product line has not changed, then the1991 overhead allocation rate *ill #e the same as the 199$ overhead allocation rate of ,-'.&

+cenario !/ 3nder scenario 5, the manifolds products #ill be dropped in 11. Therefore, the challenge is to figureout ho# much the 11 overhead is liel' to drop from the 1$ given that part of the overhead is unnecessar' ifmanifolds are not being produced. This is analogous to the drop in overhead from 1!! to 1! #hen A*+ droppedmufflers and oil pans. Additionall', #e must also figure out ho# much total direct labor costs are liel' to go do#n no#that manifolds are not being created.

Assumption 1: 4 assume that the change in overhead divided b' the change in direct labor is constant. That is,6O"/6D7* = . The best e)ample of calculating this change is to loo at #hat happened from 1!! to 1! #henA*+ dropped mufflers and oil pans.

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Bridgeton Industries: Automotive Component & Fabrication Plant Philip Larson

Assumption 5: -iven that D7* for manifolds in 1$ #as 8,9$ and these #ill all go a#a' in 11 if manifolds aredropped, 0 assume that 23" 4 -,5$from 1$ to 11.

Therefore, 6 4 -,5$ !&-99 4 17-,!% and 619914 79'9' 17-,! 4 -1%75!.

Therefore, the Overhead Allocation Rate for 11 #ould be 61991:23"19914 -1%75!:;151$!-,5$) 4 81-.