Auerbach Enterprises



Auerbach Enterprises

Overview of the topic

Auerbach Enterprises manufactures air conditioners for automobiles and trucks manufactured throughout North America. The company designs its products with flexibility to accommodate many makes and models of automobiles and trucks. The company's two main products are MaxiFlow and Alaska. MaxiFlow uses a few complex fabricated parts, but these have been found easy to assemble and test. On the other hand, Alaska uses many standard parts but has a complex assembly and testing process. MaxiFlow requires direct materials costs which total $135 per unit, while Alaska's direct materials requirements total $110 per unit. Direct labor costs per unit are $75 for MaxiFlow and $95 for Alaska. Auerbach Enterprises uses machine hours as the cost driver to assign overhead costs to the air conditioners. The company has used a company-wide predetermined overhead rate in past years, but the new controller, Bennie Leon, is considering the use of departmental overhead rates beginning with the next year. The following planning information is available for the next year for each the four manufacturing departments within the company. It is mentioned in the next page. Overhead Machine Costs Hours

Radiator parts fabrication.............. $ 80,000 10,000

Radiator assembly, weld, and test.... $100,000 20,000

Compressor parts fabrication...... .... 120,000 5,000

Compressor assembly and test........ 180,000 45,000 Total $480,000 80,000

Normally, the air conditioners are produced in batch sizes of 20 at a time. A production batch of 20 units requires the following number of hours in each department: Maxi Flow Alaska

Radiator parts fabrication........... 28 16

Radiator assembly, weld, and test....... 30 74

Compressor parts fabrication......... 32 8

Compressor assembly and test...... .. 26 66 Total 116 164

In the next following paragraphs, the important information about the costing techniques and methods will be discussed in detail.

Question 1

In today's competitive economy, manufacturing companies have to be careful not to put money and resources in an investment that cannot yield an appropriate return. And, one must realize that cost analysis is a tool to determine if an investment is a good or a bad business; therefore, most manufacturing companies are careful as they face a number of decisions that can directly or indirectly affect the cost of goods sold (COGS). Whether the manufacturing company is a large company or a small company, cost analysis is important. Some of the direct decisions that managers make involve material selection, manufacturing process selection, man hours required, and machine hours required (Lee, 2003, 57).

Some of the indirect decisions involve maintenance, turnover, quality, and administration. At the end, a bad business deal occurs when the costs to provide a given product or service are underestimated, and thus a loss of capital and investment is inflicted on the company. Alternately, when the costs are overestimated the company is not able to compete in the market. Good business occurs when the investment of resources to provide a service or goods (cost) produces a return with an increase, cost + profit = price, yet the price of the service or product ...