Question

Check my work Jordan 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 $284,000 and utility costs are $212,000. The typical consumption patterns for the two departments are as follows: points eBook Machine hours used Direct labor hours used Department I 15,200 5,800 Department II 4,800 10,200 Total 20,000 16,000 Print References 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 $496,000. 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

a)

Allocation base is direct labour hours

overhead rate on the basis of direct labour hours =    Total Overhead

                                                                                     Total direct labour hours

                                                                               

                                                                                  = ($284000+$212000)

                                                                                         (5800+10200)          

  

                                                                                       =$496000

16000

                                                                                          = $31

Statement of allocation of Overhead
Particulars	Labour hours(A)	Rate(B)	Total(A*B)
Dept II	5800	31	179800
Dept II	10200	31	316200

                                               

b)

Allocation base is Machine hours

overhead rate on the basis of machine hours =    Total Overhead _____

                                                                               Total machine hours

                                                                               

                                                                          = ($284000+$212000)

                                                                                (15200+4800)          

  

=$496000

20000

  = $24.8

Statement of allocation of Overhead
Particulars	Machine hours(A)	Rate(B)	Total(A*B)
Dept II	15200	24.8	376960
Dept II	4800	24.8	119040

c)

Allocation base is Activity based costing

Statement of Cost Driver Rates
Particulars	Cost (A)	Cost driver (B)	Total Activity ( C)	Cost Driver rate(A/B)
Fringe benefits	284000	Direct Labour hours	16000	17.75
Utility cost	212000	Machine hours	20000	10.6
Statement of Total overhead cost of each departement
Particulars	Dept I	Dept II
Fringe Benefits(A)	102950	181050
	(5800*17.75)	(10200*17.75)
Utiliy Cost(B)	161120	50880
	(15200*10.6)	(4800*10.6)
Total Cost (A+B)	264070	231930