Jocey Manufacturing Company uses two departments to make its products. Departmen

ID: 2573526 • Letter: J

Question

Jocey Manufacturing Company uses two departments to make its products. Department I is a cutting department that is machine intensive and uses very few employees. Machines cut and form parts and then place the finished parts on a conveyor belt that carries them to Department II, where they are assembled into finished goods. The assembly department is labor intensive and requires many workers to assemble parts into finished goods. The company’s manufacturing facility incurs two significant overhead costs: employee fringe benefits and utility costs. The annual costs of fringe benefits are $360,000 and utility costs are $240,000. The typical consumption patterns for the two departments are as follows.

The supervisor of each department receives a bonus based on how well the department controls costs. The company’s current policy requires using a single allocation base (machine hours or labor hours) to allocate the total overhead cost of $600,000.

Assume that you are the supervisor of Department I. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected. (Do not round intermediate calculations.)

Assume that you are the supervisor of Department II. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead that would be allocated to both departments using the base that you selected. (Do not round intermediate calculations.)

Assume that you are the plant manager and have the authority to change the company’s overhead allocation policy. Formulate an overhead allocation policy that would be fair to the supervisors of both Department I and Department II. Compute the overhead allocations for each department using your policy. (Do not round intermediate calculations.)

Explanation / Answer

The typical attitude of any manager is showing more revenues in his department and less costs to depict higher profits

Lets calculate the Overhead recovery rate using machine hours as well as labor hours:

Overhead recovery rate if machine hour is used= 600000/24000= 25 per machine hour

Overhead recovery rate if labor hour is used as base= 600000/16000= 37.5 per labor hour

a. Supervisor of department 1 will prefer direct labor hour as allocation base because it will result in significantly low cost allocation to his department= 37.5 per labor hour* 2000 hours= .75000

If machine hour base is used OH will be= 25* 20000= 500000 which is multiple times higher than the above. So he prefer to use labor hours as base

b. supervisor of department 2 will prefer machine hour as base because OH allocation in that will be = 4000*25= 100000

which is much lower than using labor hour base= 37.5*14000= 525000

c. as a plant manager to ensure fair OH allocation, multiple OH recovery rate policy should be used.

fringe benefit costs should be allocated based on labor hours and utility costs based on machine hours.

Recovery rates are:

for Utility cost= 240000/24000= 10 per machine hour

for fringe benefits= 360000/16000= 22.5 per labor hour

Then department 1 OH= labor hours* per labor hour fringe benefit + machine hours*per machine hour utility cost

= 20000*10 +2000*22.5= 245000

department 2 OH allocation= 4000*10 +14000*22.5= 355000

Navigate

Jocey Manufacturing Company uses two departments to make its products. Departmen

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.

Jocey Manufacturing Company uses two departments to make its products. Departmen

Question

Explanation / Answer

Related Questions

Navigate