Oriole Products manufactures two component parts: AJ40 and AJ60. AJ40 components are being introduced currently, and AJ60 parts have been in production for several years. For the upcoming period, 1,500 units of each product are planned for manufacturing. Assume that the only relevant overhead cost is for engineering change orders (any requested changes in product design or the manufacturing process). AJ40 components are expected to require 4 change orders and AJ60 only 2. Each AJ40 requires 1 machine hour, and each AJ60 requires 1.5 machine hours. The cost of a change order is $420. Required:
Estimate the cost of engineering change orders for AJ40 and AJ60 components if Blue uses a traditional costing method and machine hours as the allocation base.

Total allocated cost for AJ40 $189,000

Total allocated cost for AJ60$283,500

Total $472,500

Explanation:

Calculation to Estimate the cost of engineering change orders for AJ40 and AJ60

First step is to calculate for the Total number of change orders

AJ40AJ60

Units planned1,5001,500

÷No. of change orders42

=Total number of change orders375+750=1,125

Second step is to for the Total cost of change order

AJ40AJ60

Units planned1,5001,500

×Machine hours per unit11.5

=Total machine hours required1,500 + 2,250=3,750

Third step is to find the Total cost of change order

AJ40AJ60

Total number of change orders375750

× Cost of a change order $420 $420

=Total cost of change order$157,500 $315,00

Total cost of change order=$157,500 +$315,000

=Total cost of change order =$472,500

Now let Estimate the cost of engineering change orders for AJ40 and AJ60 using Traditional system

TRADITIONAL SYSTEM

Total allocated cost for AJ40 $189,000(472,500*1,500/3,750)

Total allocated cost for AJ60$283,500(472,500*2,250/3,750)

Hence,

Total allocated cost for AJ40 $189,000+Total allocated cost for AJ60$283,500

=$472,500

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