Departmental Factory Overhead Rates. The Cheetah Company produces custom-made stuffed toy animals and competes in a highly competitive market¬ place. The company’s selling prices are calculated as the cost of production plus a 30% markup. The produc¬ tion process consists of two departments: the Skins Department where the outside liners (skins) are hand¬ made for each toy animal from specially ordered materi¬ als, 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 allocation of the costs of these two departments are as follow:

Purchasing:

(a) Purchases all materials and supplies required for all departments.

(b) Its fixed cost is allocated to the two production departments based on the number of square feet each department occupies.

(c) Its variable cost is allocated based on total volume of materials ordered by each department.

Cleaning and Maintenance:

(a) Cleans the entire building and maintains all equip¬ ment in the company.

(b) Both variable and fixed costs of the department are allocated to the two production departments on the basis of the number of square feet each department occupies.

Required:

(1) Should the company use a plantwide overhead rate or departmental overhead rates? Explain.

(2) Comment on the company’s cost allocation meth¬ ods, and, where necessary, suggest improvements. Fully justify any suggested improvements.

(SMAC adapted)