Andersonville Company produces custom-made stuffed toy animals and competes in a highly competitive marketplace. The company's selling prices are calculated as the cost of production plus a 30% markup. The production process consists of two departments: the Skins Department where the outside liners (skins) are handmade for each toy animal from specially ordered materials, and the Stuffing Department where the skins are filled by machine with a standard stuffing material to complete the toys. The Skins and Stuffing Departments both receive services from the company's two service departments, the Purchasing Department and the Cleaning and Maintenance Department. A description of each service department's operations and the distribution of the costs of these two departments are as follows:
Purchasing:
(a) Purchases all materials and supplies required for all departments.
(b) Its fixed cost is distributed to the two production departments based on the number of square feet each department occupies.
(c) Its variable cost is distributed based on total volume of materials ordered by each department.
Cleaning and Maintenance:
(a) Cleans the entire building and maintains all equipment in the company.
(b) Both variable and fixed costs of the department are distributed to the two production departments on the basis of the number of square feet each department occupies.
Required:
(a) Should the company use a plant wide overhead rate or departmental overhead rates? Explain.
(b) Comment on the company's cost distribution methods, and, where necessary, suggest improvements. Fully justify any suggested improvements.