Question

Finch 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 $272,000 and utility costs are $200,000. The typical consumption patterns for the two departments are as follows: Machine hours used Direct labor hours used Department I 15,500 5,500 Department II 4,500 10,500 Total 20,000 16,000 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 $472,000. Required a. 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. b. 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. 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.

Answer 1

Answer:

Answer-a:
Total overhead cost	472000
Total machine hours	20000
Overhead cost per machine hour	23.6	per machine hour
Total labor hours	16000
Overhead cost per labor hour	29.5	per labor hour
Overhead cost to Department 1 based on machine hours = (15,500 × $23.60)	365800
Overhead cost to Department 1 based on labor hours = (5,500 × $29.50)	162250
So for Department 1, it is better to allocate overhead based on labor hours.
Answer-b:
Overhead cost to Department 2 based on machine hours = (45,500 × $23.60)	106200
Overhead cost to Department 2 based on labor hours = (10,500 × $29.50)	310800
So for Department 2, it is better to allocate overhead based on machine hours.

Answer-c:

It is better to allocate overhead based on ABC costing as one department is labor intensive and another is machine intensive.

Under ABC costing, fringe benefit will be allocated based on labor hours and utility cost will be allocated based on machine hours.

Fringe benefit overhead cost per labor hour = $272,000 / 16,000 = $17

Utility overhead cost per machine hour = $200,000 / 20,000 = $10

Allocated overhead cost of Department 1 = (5,500 × $17) + (15,500 × $10) = $248,500

Allocated overhead cost of Department 2 = (10,500 × $17) + (4,500 × $10) = $223,500