Question

Cost Assignment and JIT

Bunker Company produces two types of glucose monitors (basic and advanced). Both pass through two producing departments: Fabrication and Assembly. Bunker also has an Inspection Department that is responsible for testing monitors to ensure that they perform within prespecified tolerance ranges (a sampling procedure is used). Budgeted data for the three departments are as follows:

	Inspection	Fabrication	Assembly
Overhead	$640,000	$960,000	$272,000
Number of tests	—	40,000	120,000
Direct labor hours	—	96,000	48,000

In the Fabrication Department, the basic model requires 0.3 hour(s) of direct labor and the advanced model requires 0.6 hour(s). In the Assembly Department, the basic model requires 0.5 hour(s) of direct labor and the advanced model requires 0.85 hours. There are 60,000 basic units produced and 32,000 advanced units.

Immediately after preparing the budgeted data, a consultant suggests that two manufacturing cells be created: one for the manufacture of the basic model and the other for the manufacture of the advanced model. Raw materials would be delivered to each cell, and goods would be shipped immediately to customers upon completion. Workers within each cell would also be trained to perform monitor testing. The total direct overhead costs estimated for each cell would be $304,000 for the basic cell and $960,000 for the advanced cell.

Required:

1. Allocate the inspection costs to each department.

Fabrication	$
Assembly	$

Compute the overhead cost per unit for each monitor. Overhead rates use direct labor hours. Round your intermediate calculations and final answers to the nearest cent.

Basic	$ per unit
Advanced	$ per unit

2. Compute the overhead cost per unit if manufacturing cells are created. If required, round your intermediate calculations and final answers to the nearest cent.

Basic	$ per unit
Advanced	$ per unit

Which unit overhead cost do you think is more accurate—the one computed with a departmental structure, or the one computed using a cell structure?

• Cell structure
• Departmental structure
• Cannot answer due to insufficient information

Answer 1

ANSWER:-

	Inspection overhead cost per test	4	(640000/160000)
1	Fabrication	$160,000
	Assembly	480000
		Fabrication	Assembly
	Allocated Inspection cost	160000	480000
	Add: Overhead dept cost	960000	272000
	Total Dept.OH cost	1120000	752000
	Total direct labor hours	96000	48000
	OH cost per direct labor hour	11.67	15.67
	Basic	$11.34 per unit	11.34
	Advanced	$20.33 per unit	20.33
2	Basic	$5.07 per unit	(304000/60000)
	Advanced	$30 per unit	(960000/32000)
	The one computed using a cell structure is more accurate.

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