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 $316,000 and utility costs are $244,000. The typical consumption patterns for the two departments are as follows. Department I Department II Total Machine hours used 14,400 5,600 20,000 Direct labor hours used 6,600 9,400 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 $560,000.

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. (Do not round intermediate calculations.)

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. (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.)

Explanation / Answer

Department 1 Department 2 Total Machine Hours 14400 5600 20000 Direct labour Hours 6600 9400 16000 Overhead Cost 560000 If cost is allocated according to Machine hours Department 1 Department 2 Total 403200 156800 560000 560000/20000*14400 560000/20000*5600 If cost is allocated according to labour hours 231000 329000 $ 560000/16000*6600 560000/16000*9400 a) For Department 1 allocation by direct labour hour minimizes cost and the overhead cost is $231000 b) For Department 2 allocation by machine hour minimizes cost and the overhead cost is $156800 c) According to pLant manager the cost will be allocated on following manner to be fair Direct labour hours Total Dept 1 Dept 2 Employee Fringe benefit should be based on direct labour hours 316000 6600 9400 16000 130350 185650 Machine Hours Utility cost on machine hours 244000 14400 5600 20000 175680 68320 Total 306030 253970

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