If Porsche”s management had estimated the profit per vehicle based on its budgeted production of…

Business Applications Case Allocating fixed costs at Porsche

During its fiscal year ending on July 31, 2006, the Dr. Ing. h.c. F. Porsche AG, commonly known as Porsche,” manufactured 102,602 vehicles. During that same year Porsche recorded depreciation on property, plant, and equipment of €323,958,000. (Porsche’s financial information is reported in euros, and € is the symbol for the euro.) For the purposes of this problem assume that all of the depreciation related to manufacturing activities.


a. Indicate whether the depreciation charge is a

(1) Product cost, or a general, selling, and administrative cost.

(2) Relevant cost with respect to a special order decision.

(3) Fixed or variable cost relative to the volume of production.

(4) Direct or indirect if the cost object is the cost of vehicles made in the 2006 fiscal year.

b. Assume that Porsche incurred depreciation of €27,000,000 during each month of the 2006 fiscal year, but that it produced 7,000 vehicles during February and 10,000 during March. Based on monthly costs and production levels, what was the average amount of depreciation cost per vehicle produced during each of these two months, assuming each vehicle was charged the same amount of depreciation?

c. If Porsche had expected to produce 98,000 vehicles during 2006, and had estimated its annual depreciation costs to be €324,000,000, what would have been its predetermined overhead charge per vehicle for depreciation? Explain the advantage of using this amount to determine the cost of manufacturing a car in February and March versus the amounts you computed in Requirement b.

d. If Porsche’s management had estimated the profit per vehicle based on its budgeted production of 98,000 units, would you expect its actual profit per vehicle to be higher or lower than expected? Explain.

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