# 40 aaa metal bearings produces two sizes of metal bearings sold by the crate standar 4306851

40) AAA Metal Bearings produces two sizes of metal bearings (sold by the crate)—standard and heavy. The standard bearings require \$200 of direct materials per unit (per crate) and the heavy bearings require \$245 of direct materials per unit. The operation is mechanized and there is no direct labor. Previously AAA used a single plant-wide allocation rate for manufacturing overhead, which was \$1.55 per machine hour. Based on the single rate, gross profit was as follows:

Per unitStandardHeavy

Direct material cost\$200.00\$245.00

Total manufacturing cost\$324.00\$338.00

Price per unit350.00370.00

Gross profit per unit\$26.00\$32.00

Although the data showed that the heavy bearings were more profitable than the standard bearings, the plant manager knew that the heavy bearings required much more processing in the metal fabrication phase than the standard bearings, and that this factor was not adequately reflected in the single allocation rate. He suspected that it was distorting the profit data. He suggested adopting an activity-based costing approach.

Working together, the engineers and accountants identified the following three manufacturing activities, and broke down the annual overhead costs as shown below:

Activities:Estimated Cost

Metal fabrication\$420,000

Machine processing\$152,000

Packaging\$17,000

Engineers believed that metal fabrication costs should be allocated by weight, and estimated that the plant processed 12,000 kilos of metal per year. Machine processing costs were correlated to machine hours, and the engineers estimated a total of 380,000 machine hours for the year. Packaging costs were the same for both types of products, and so they could be allocated simply by the number of units produced. The production plan provided for 4,000 units of standard and 1,000 units of heavy bearings to be produced during the year. Additional data on a per unit basis was as given below:

StandardHeavy

Kilos per unit2.004.00

Machine hours per unit80.0060.00

Using the data above, calculate activity rates. Then, following the ABC methodology, calculate the production cost and gross profit for one unit of standard bearings. (Round your intermediate calculations to two decimal places).

41) Cardec, a leading manufacturer of car spare parts, divided its manufacturing process into two departments: 1) Production 2) Packing. Estimated overhead costs for the Production and Packing department amounted to \$25,000,000 and \$20,000,000, respectively. The company produces two types of parts: Part-1 and Part-2. The total estimated labor hours for the year 2015 were 40,000 and estimated machine hours were 50,000. The Production department was mechanized whereas the Packing department was labor oriented. Calculate departmental overhead allocation rates.

ProductionPacking

Machine hoursLabor hours

Part-115,00025,000

Part-235,00015,000

50,00040,000

Learning Objective 24-2

1) A company in which major planning and controlling decisions are made by top management is considered as a centralized company.

2) In a decentralized company, all the planning and controlling decisions are made by the top management.