[Anonymous]

Becker Question –

Anyone want to take a stab at explaining this to me. I don’t understand why the Buy scenario includes fixed manufacturing OH based on the $s from the Build scenario. The fixed manufacturing OH is based on 150% of DL but the DL would be 0$s in the Buy scenario because there is no DL if they are purchasing the product. If the OH is based on DL and there is no DL shouldn’t they be using something else to come up with a number for fixed OH other than a number that wouldn’t exist?

Richardson Motors uses ten units of Part Number T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented below.

Direct materials $ 2,000
Material handling (20% of direct material cost) 400
Direct labor 16,000
Manufacturing overhead (150% of direct labor) 24,000
Total manufacturing cost $ 42,400

Material handling, which is not included in manufacturing overhead, represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost. Richardson’s annual manufacturing overhead budget is one-third variable and two-thirds fixed. Simpson Castings, one of Richardson’s reliable vendors, has offered to supply T305 at a unit price of $30,000.

If Richardson Motors purchases the ten T305 units from Simpson Castings, the capacity Richardson used to manufacture these parts would be idle. Should Richardson decide to purchase the parts from Simpson, the out-of-pocket cost per unit of T305 would:

Explanation
Choice “d” is correct. Increase $9,600.

Direct materials, Build: $ 2,000 Buy:$ 30,000
Material handling (20% of DM cost) Build: $400 Buy: $6,000
Direct labor Build: $16,000 Buy: $0
Manufacturing OH − variable Build: $8,000 Buy: $0
Manufacturing OH − fixed Build: $6,000 Buy: $16,000 (this is where I’m confused – it’s based on DL from the Build scenario)

Total costs Build: $ 42,400 Buy: $ 52,000

 

 

[ssiegri]

On a very quick overviewed level, I would say FMOH is included in the buy equation, because it's a fixed cost that is going to be there regardless if you build or buy..

[ssiegri]

On a very quick overviewed level, I would say FMOH is included in the buy equation, because it's a fixed cost that is going to be there regardless if you build or buy..

[Anonymous]

I think u should use relevant costs method for this case study:

Make products: The fixed cost 24,000x 2/3= 16,000 still remains regarless u make or buy

->Relevant Cost : 2,000+ 400+ 16,000+ 8,000 (variable cost (OH)) =26,400

Buy Products: Relevant Cost= 30,000+ 6,000= 36,000

How to calculate 6000? 🙂 Notice that Receiving Department are applied to materials and components. T305 is component. Cost is 20%x30,000= 6000

So the result is 36,000 – 26,400= 9,600 (increase) -> making is better

[Anonymous]

I think u should use relevant costs method for this case study:

Make products: The fixed cost 24,000x 2/3= 16,000 still remains regarless u make or buy

->Relevant Cost : 2,000+ 400+ 16,000+ 8,000 (variable cost (OH)) =26,400

Buy Products: Relevant Cost= 30,000+ 6,000= 36,000

How to calculate 6000? 🙂 Notice that Receiving Department are applied to materials and components. T305 is component. Cost is 20%x30,000= 6000

So the result is 36,000 – 26,400= 9,600 (increase) -> making is better

[Anonymous]

Sorry if my English makes u confuse 🙂

[Anonymous]

Sorry if my English makes u confuse 🙂

[mla1169]

The previous direct labor becomes a fixed mfg oh cost because the problem says”the capacity used to manufacture these parts will remain idle” meaning youre paying the production staff to stand around and do nothing and the cost is still there. If the production staff went on to work on other jobs instead, you would be correct that it shouldnt be considered.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[mla1169]

The previous direct labor becomes a fixed mfg oh cost because the problem says”the capacity used to manufacture these parts will remain idle” meaning youre paying the production staff to stand around and do nothing and the cost is still there. If the production staff went on to work on other jobs instead, you would be correct that it shouldnt be considered.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[jahnesta8]

I did this a different way:

Make Buy

Purchase Price 0 30000

DM 2000 0

Material Handling 400 6000

DL 16000 0

MFG FOH don't care 0

MFG VOH 8000 0

Total 26400 36000

Difference 9600

The prompt says that material handling represents “the represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost.” Since the receiving department will be handling $30,000 of material, 20% of that cost should be allocated to material handling. $30,000 x .2 = $6,000

[jahnesta8]

I did this a different way:

Make Buy

Purchase Price 0 30000

DM 2000 0

Material Handling 400 6000

DL 16000 0

MFG FOH don't care 0

MFG VOH 8000 0

Total 26400 36000

Difference 9600

The prompt says that material handling represents “the represents the direct variable costs of the Receiving Department that are applied to direct materials and purchased components on the basis of their cost.” Since the receiving department will be handling $30,000 of material, 20% of that cost should be allocated to material handling. $30,000 x .2 = $6,000

[Author]

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