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

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.)

c. 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.)

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.

Explanation / Answer

A) Compuation of best allocation to reduce overhead cost to Department 1 Total overhead cost 600000 Total Machine hours 24000 Over head cost pe machine hour = 600000/24000 = 25 per hour Total Lbout hours 16000 Over head cost pe Labour Hour = 600000/16000 37.5 per hour Over head cost to department 1 based on Machine hours   = 25*20000 500000 Over head cost to department 1 based on Labour hours   = 37.5*2000 75000 So for department 1 it is better to allocate based on labour hours B) Compuation of best allocation to reduce overhead cost to Department 2 Over head cost to department 2 based on Machine hours   = 25*4000 100000 Over head cost to department 2 based on Labour hours   = 37.5*14000 525000 So for department 2 it is better to allocate based on Machine hours C) Compuation of best allocation based on overall company point of view Here one department have more labour hours and another department is working with more machine hours so it is better to allocate overheads under ABC costing. Under ABC costing cost of fringe benits is related to labour so fringe benefit overhead cost has to allocate based on labour hours and utility cost has to allocate based on machine hours Over head cost pe machine hour = 240000/24000 10 per machine hour Over head cost pe Labour Hour = 360000/16000 22.5 per labour hour Allocation of overhead cost Department 1   = 20000*10 + 2000*22.5 245000 Department 2   = 4000*10 + 14000*22.5 355000

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