Pettway Furniture Company has two production departments. The parts department uses automated machinery to make parts; as a result, it uses very few employees. The assembly department is labor intensive because workers manually assemble parts into finished furniture. Employee fringe benefits and utility costs are the two major overhead costs of the company’s production division. The fringe benefits and utility costs for the year are $300,000 and $144,000, respectively. The typical consumption patterns for the two departments follow. 

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 activity base (machine hours or labor hours) to allocate the total overhead cost of $444,000. 

Required

a. Assume that you are the parts department supervisor. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead to allocate to both departments using the base that you selected.

b. Assume that you are the assembly department supervisor. Choose the allocation base that would minimize your department’s share of the total overhead cost. Calculate the amount of overhead to allocate to both departments using the base that you selected.

c. Assume that you are the plant manager and that you 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 the parts and assembly departments. Compute the overhead allocation for each department using your policy.

d. Explain why it is necessary to disaggregate the overhead cost pool in order to accomplish fairness. 

Transcribed Image Text:

Parts Total Assembly Machine hours used Direct labor hours used 26,000 3,500 $ 4,000 20,500 30,000 24,000