Q 1: The overhead allocation rate using the 1987 model year budget was 437%, while the official overhead allocation rate used in the 1987 model year strategy study was 435%. The difference was because the official overhead allocation rate was based on actual labor costs and overhead expenses, when the budget overhead allocation rate was calculated on budget labor costs and overhead expenses.
Q2: There was a slight change in overhead allocation rate from 1987 (437%) to 1988 (434%). However, the rate rose significantly at 1989 (577%), and went down a little at 1990 (563%). The main reason for the increase was because at the end of the 1988 model year, oil pans and muffler-exhaust systems were outsourced. Direct labor costs for those two components then fell to 0 at 1989 and 1990, since the reduced labor were transferred and paid by the union, and this was no longer a plant burden cost. Therefore, direct labor went down 46% from 1988 to 1989, when total budget overhead just dropped 28%.
Q3:
Q4: The product costs reported by the cost system were not appropriate for use in the strategic analysis. This cost accounting system used a single cost pool, and 435% of direct labor was used to allocate total overhead. However, direct labor was not compatible with the characteristics of certain overhead. For instance, overhead 8000 was depreciation, and depreciation should have been allocated to machine hours rather than labor cost. What’s more, setup overhead 11000 was not closely related to labor cost, nor was production supplies, or wearing tools. Product costs could have been more precise, if the system had applied multiple allocation methods for overhead costs.