Bridgeton Industries
Vanessa
ACCT 606
CASE 2
2/8/2011
1. I use: overhead for period / allocation base for period (in this case-DL)=Overhead Allocation Rate
In 1987, OH$107,954/DL$24,682=437%
2. The changes from 1987 to 1988 were not significant. However, the changes in overhead allocation rates in 1989 and 1990 appeared to be significant when compared to 1987 rates. Because in 1988 and 1989, total overhead costs decreased about 25%, but direct labor costs, direct material costs in decreased even more (about 40~50%) , and sales decreased about 30% . That caused the changes of rate became significant. According to the case, at the end of the 1988 model year “oil pans and muffler exhaust systems were outsourced to the “ACF” which explained why direct labor costs and material costs went down in the faster pace than overhead. | Overhead/DL (%) | OH/DM (%) | OH/SALES (%) | 1987 | 437 | 88 | 33 | 1988 | 434 | 86 | 31 | 1989 | 577 | 117 | 36 | 1990 | 563 | 114 | 35 | 3. Gross Margin % = Gross Profit (Price-DL-DM-OH)/Price The gross margin went down a lot because the overhead cost in 1989 went up significantly. | Price $ | DM $ | DL $ | OH $ | Gross Profit $ | Gross Margin % | 1988 Product1 | 62 | 16 | 6 | 26.04 | 13.96 | 22.5 | 1988 Product2 | 54 | 27 | 3 | 13.02 | 10.98 | 20.3 | 1989 Product1 | 62 | 16 | 6 | 34.62 | 5.38 | 8.7 | 1989 Product2 | 54 | 27 | 3 | 17.31 | 6.69 | 12.4 |
4. The company use one single overhead pool with costs allocated on direct labor cost. However, in the total of overhead pool, not all are fixed, but there are some variable indirect costs. By using only one overhead pool does not reflect the actual indirect cost that caused by different classes. 5. Under scenario 1, no additional products will be dropped from 1990 to 1991. Therefore, the difference of change in overhead allocation rate from 1990 to 1991 will be very small, like from 1987 to 1988 when the product line remained the same. Assuming that
ACCT 606
CASE 2
2/8/2011
1. I use: overhead for period / allocation base for period (in this case-DL)=Overhead Allocation Rate
In 1987, OH$107,954/DL$24,682=437%
2. The changes from 1987 to 1988 were not significant. However, the changes in overhead allocation rates in 1989 and 1990 appeared to be significant when compared to 1987 rates. Because in 1988 and 1989, total overhead costs decreased about 25%, but direct labor costs, direct material costs in decreased even more (about 40~50%) , and sales decreased about 30% . That caused the changes of rate became significant. According to the case, at the end of the 1988 model year “oil pans and muffler exhaust systems were outsourced to the “ACF” which explained why direct labor costs and material costs went down in the faster pace than overhead. | Overhead/DL (%) | OH/DM (%) | OH/SALES (%) | 1987 | 437 | 88 | 33 | 1988 | 434 | 86 | 31 | 1989 | 577 | 117 | 36 | 1990 | 563 | 114 | 35 | 3. Gross Margin % = Gross Profit (Price-DL-DM-OH)/Price The gross margin went down a lot because the overhead cost in 1989 went up significantly. | Price $ | DM $ | DL $ | OH $ | Gross Profit $ | Gross Margin % | 1988 Product1 | 62 | 16 | 6 | 26.04 | 13.96 | 22.5 | 1988 Product2 | 54 | 27 | 3 | 13.02 | 10.98 | 20.3 | 1989 Product1 | 62 | 16 | 6 | 34.62 | 5.38 | 8.7 | 1989 Product2 | 54 | 27 | 3 | 17.31 | 6.69 | 12.4 |
4. The company use one single overhead pool with costs allocated on direct labor cost. However, in the total of overhead pool, not all are fixed, but there are some variable indirect costs. By using only one overhead pool does not reflect the actual indirect cost that caused by different classes. 5. Under scenario 1, no additional products will be dropped from 1990 to 1991. Therefore, the difference of change in overhead allocation rate from 1990 to 1991 will be very small, like from 1987 to 1988 when the product line remained the same. Assuming that