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