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 companyâs 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 companyâs current policy requires using a single allocation base (machine hours or labor hours) to allocate the total overhead cost of $720,000.

Required
Assume that you are the supervisor of Department

a. Calculate the allocation base that would minimize your departmentâs share of the total overhead cost.
b. Calculate the allocation base that would minimize your departmentâs share of the total overhead cost.
c. Calculate the amount of overhead that would be allocated to both departments using the base that you selected.
d. Compute of allocation rates for total overhead cost

Clement Manufacturing Company

a. As the supervisor of Department I:

Using direct labor hour as an allocation base minimizes my department's share of the total overhead cost to $90,000.

b. As the supervisor of Department II:

Using machine hour as an allocation base minimizes my department's share of the total overhead cost to $120,000.

c. Amount allocated to each department:

Single rate:               Department I     Department II

Machine hours         $600,000         $120,000

Direct labor hours        90,000           630,000

d. Allocation rates for the total overhead cost:

Machine hours = $30 per machine hour ($720,000/24,000)

Direct labor hours = $45 per DLH ($720,000/16,000)

Explanation:

a) Data and Calculations:

Overhead costs:

Fringe benefits = $420,000

Utility costs =          300,000

Total overhead = $720,000

                                   Department I     Department II      Total

Machine hours used        20,000              4,000             24,000

Direct labor hours used     2,000             14,000             16,000

Single allocation base

Machine hour = $720,000/24,000 machine hours

= $30 per machine hour

Direct labor hours = $720,000/16,000

= $45 per direct labor hour

Single rate:               Department I     Department II

Machine hours         $600,000         $120,000

Direct labor hours        90,000           630,000

The best method:

ABC allocation basis:               Department I     Department II

Fringe benefits = $420,000         $52,500         $367,500  based on DLH

Utility costs =          300,000         250,000             50,000  based on MH

Total overhead = $720,000       $302,500          $417,500

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