balfore office makes metal five drawer desks and occasionally 272173

Balfore Office makes metal five drawer desks and, occasionally, takes custom orders. The company’s overhead costs for a month in which no custom desks are produced are as follows:

Purchasing Department for raw material and supplies (20 purchase

orders per month) ………………………………………………$10,000

Setting up machines for production runs (4 times per month after

maintenance checks) ……………………………………………. 2,480

Utilities (based on 6,400 machine hours) ……………………………… 320

Supervisor salaries …………………………………………………….. 16,000

Machine and building depreciation (fixed) …………………………… 11,000

Quality control and inspections performed on random selection

of desks each day; one quality control worker ……………….. 5,000

Total overhead costs ………………………………………………….$44,800

Factory operations are highly automated, and overhead is allocated to products based on machine hours.

In July 2010, six orders were filled for custom desks. Selling prices were based on charges for actual direct material, actual direct labor, and the overhead rate per machine hour. During July, the following costs were incurred for 6,400 hours of machine time:

Purchasing Department for raw material and supplies (44 purchase

orders per month) ………………………………………………..$12,400

Setting up machines for production runs (18 times) …………………… 3,280

Utilities (based on 6,400 machine hours) ……………………………… 320

Supervisor salaries …………………………………………………….. 16,000

Machine and building depreciation (fixed) …………………………… 11,000

Quality control and inspections performed on random selection

of desks each day; one quality control worker ……………….. 5,960

Engineering design and specification costs ………………………….. 6,000

Total overhead costs ………………………………………………….$54,960

a. How much of the purchasing department cost is variable and how much is fixed?

What types of purchasing costs would fit into each of these categories?

b. Why might the number of machine setups have increased from 4 to 18 when only six custom orders were received?

c. Why might the cost of quality control and inspections have increased?

d. Why were engineering design and specification costs included during July?

e. If Balfore Office were to adopt activity based costing, what would you suggest as the cost drivers for each of the overhead cost items?

f. What is the current predetermined overhead rate based on machine hours? Do you think the custom orders should have been priced using this rate per machine hour?

Explain the reasoning for your answer.