Zubick Corporation produces and supplies 2 types of component

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Description

Zubick Corporation produces and supplies 2 types of component parts to industrial equipment manufacturers. These parts are known as X123 and R907. There are 2 departments in the factory: the machining and assembly departments. The machining department has highly automated operations, while assembly has labour-intensive operations.
Table 1: Annual production data bProductct 123 y produ X
Units produced

Product R907
1, 000

5 DLH

15 DLH

1 5 MH

Total direct labour hours (DLH) consumed per unit
Total machine hours (MH)
consumed per unit

2,000

5 MH

The overhead cost incurred in the Machining department was $1,300,000, while the overhead cost in the Assembly department was $350,000.

Table 2: Annual overhMachining nd pt oductAssectivilty dept epartmentTotal ead costs a de pr
ion a mb y by d
Overhead cost
Direct labour hours
(DLH) consumed
per dept
Machine hours
(MH) consumed
per dept

$1,300,000

$350,000

$1,650,000

5,000 DLH

30,000 DLH

35,000 DLH

23,000 MH

2 , 0 0 0 MH

25,000 MH

The manager, Rex, decided to allocate costs to the 2 products in the following manner: he divided the total overhead costs of $1,650,000 by the total number of labour hours utilised in the factory (ie (1000 x5) plus (2000 x 15) = 35,000 DLH). Therefore his overhead rate was $1,650,000/35,000 = $47.14 per DLH.

The overhead allocated to each product using Rex’s rate was as follows:
Product X123 = 5 DLH x$47.14 = $235.70
Product R907 = 15 DLH x $47.14 = $707.10
But Rex was losing sales of product R907 to his competitor who was able to sell a similar product at a lower price, and recover all costs of production.
Additional information:
Tables 3 and 4 show how much direct labour and machine time is consumed by each product in each production department.
Table 3: Machine hourMachining sumed by each mbducteiptproductital per urnit ents.
s (MH) con dept
Asse proly d n
To on depa tm of
Per unit of product
X123
Per unit of product
R907

14.5 MH

0.5 MH

4.25 MH

0.75 MH

product
15 MH per unit of
X123
5 MH per unit of
R907

Table 4: Direct labour hours (DLH) consumed by each product in production departments.

Required:
i) Do you agree or disagree with Rex’s overhead allocation method? Explain. You should draw on information provided in Tables 1 to 4 to help explain and support your answer. (5 marks).
ii) How would you improve it? Calculate alternative rates that you would use and explain why you think it would help Rex. You should draw on information provided in Tables 1 to 4 to support your recommendation.

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