Clement Manufacturing Company uses two departments to make its products. Departm

Question

Clement 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 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 $420,000 and utility costs are $300,000. The typical consumption patterns for the two departments are as follows:

Department I Department II Total
Machine hours used 20,000 4,000 24,000

Direct labor hours used 2,000 14,000 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 $720,000.

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. 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.

Computation of allocation rates for total overhead cost

Cost ÷ Base Computation Allocation Rate



The amount of overhead cost allocated to the department

Department Allocation Rate ÷ Weight of base = Allocated Cost
I
II
Total

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.
Department Allocation Rate ÷ Weight of base = Allocated Cost
I
II
Total

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 supervisor of both Department I and Department II. Compute the overhead allocations for each department using your policy.
Cost ÷ Base Computation Allocation Rate
Utilities
Fringe benefits


Allocations for the respective departments:
Cost Allocation Rate X Weight of base = Department I Department II
Fringe benefits
Fringe benefits
Utility
Utility
Total

4GLT..d 27% 10:09 PM SOLO LECTURA: el formato de este archivo es a Computation of allocation rates for total overhead cost Cost Base Computation Allocation Rate The amount of overhead cost allocated to the department Department Allocation Rate Weight of base Allocated Cost Total 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. Department Allocation Rate Weight of base Allocated Cost Total 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 supervisor of both Department I and Department II. Compute the overhead allocations for each department using your policy C. Cost Base Computation Allocation Rate Fringe benefits Allocations for the respective departments: Allocation Rate Cost Weight of baseDepartmen Department lI Fringe benefits Fringe benefits Utilit Utilit Tota

Explanation / Answer

Req 1: As a supervisor of Deptt 1, I will recommnend labour hours as allocation base which will reduce the overheads of Deptt 1 Overheads rate based on Labour hours Total Cost / Base Computation Allocation rate Fringe Benefits / labour hours (420,000/16000) 26.25 Utilities / labour hours (300,000 /16,000) 18.75 Total Allocation rate 45 Amount of overhead cost to departments Deptt Allocation rate * Weight base = Allocated cost 1 45 2000 90000 2 45 14000 630000 Req 2: As a supervisor of Deptt 2, overheads should be allocated on the basis of machine hours to reduce the cost of deptt 2 Overheads rate based on Labour hours Total Cost / Base Computation Allocation rate Fringe Benefits / Machine hours (420,000/24000) 17.5 17.5 Utilities / Machine hours (300,000 /24,000) 12.5 12.5 Total Allocation rate 30 Amount of overhead cost to departments Deptt Allocation rate * Weight base = Allocated cost 1 30 20000 600000 2 30 4000 120000 Req 3: Utilities should be allocated basd on machine hours Fringe benefits should be allocated based on labour hours Total Cost / Base Computation Allocation rate Fringe benefits Fringe Benefits / labour hours (420,000/16000) 26.25 Utilities Utilities / Machine hours (300,000 /24,000) 12.5 Cost Allocation rate * Weight of base = Deptt 1 Deptt 2 Fringe benefits 26.25 2000 52500 Fringe benefits 26.25 14000 367500 Utilities 12.5 20000 250000 utilities 12.5 4000 50000 Total Allocated cost 302500 417500

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