McKeoun Enterprises is a large machine tool company now experiencing alarming increases in maintenance expense in each of its four production departments. Maintenance costs are
McKeoun Enterprises is a large machine tool company now experiencing alarming increases in maintenance expense in each of its four production departments. Maintenance costs are currently allocated to the production departments on the basis of labor-hours incurred in the production department. To provide pressure for the production departments to use less maintenance, and to provide an incentive for the maintenance department to become more efficient, McKeoun has decided to investigate new methods of allocating maintenance costs. One suggestion now being evaluated is a form of outsourcing: The producing departments could purchase maintenance service from an outside supplier. That is, they could choose either to use an outside supplier of maintenance or to be charged an amount based on their use of labor-hours. The following table shows the labor-hours in each department, the allocation of maintenance cost based on labor-hours, and the cost to purchase the equivalent level of maintenance service from an outside maintenance provider.
| Direct Labor-Hours Allocation Base | Direct Labor-Hours Allocation Cost | Outside Price | |||
| Production Dept. | |||||
| A | 20% | $90,000 | $115,000 | ||
| B | 30% | $135,000 | $92,000 | ||
| C | 10% | $45,000 | $69,000 | ||
| D | 40% | $180,000 | $184,000 | ||
| 100% | $450,000 | $460,000 |
Required
1. As a first step in moving to the outsourcing approach, McKeoun is considering an allocation based on the price of the outside maintenance supplier for each department. Calculate the cost allocation on this basis and compare it to the current labor-hour basis.
2. If McKeoun follows the proposed plan, what is likely to happen to the overall use of maintenance? How will each department manager be motivated to increase or decrease the use of maintenance? What will be the overall effects of going to the new plan?
Step by Step Solution
3.39 Rating (168 Votes )
There are 3 Steps involved in it
1 Revised cost allocation Outside Price Percentage based on Outside Price Allocation of Total Mainte... View full answer
Get step-by-step solutions from verified subject matter experts
100% Satisfaction Guaranteed-or Get a Refund!
Document Format (1 attachment)
249-B-M-L-S-M (630).xlsx
300 KBs Excel File
See step-by-step solutions with expert insights and AI powered tools for academic success
-
Access 30 Million+ textbook solutions.
-
Ask unlimited questions from AI Tutors.
-
Order free textbooks.
-
100% Satisfaction Guaranteed-or Get a Refund!
Claim Your Hoodie Now!
Cost management a strategic approach
Authors: Edward J. Blocher, David E. Stout, Gary Cokins
5th edition
73526940, 978-0073526942
Study Smart with AI Flashcards
Access a vast library of flashcards, create your own, and experience a game-changing transformation in how you learn and retain knowledge
Explore Flashcards
Study Help
