Franzel Company manufactures several different models of luggage in its four manufactur- ing departments. These four departments and one service department (Equipment Mainte- nance) are housed in one facility. Due to the distinctive characteristics of the costs and operations of the different manufacturing departments, departmental manufacturing over- head rates are employed for each manufacturing department. 

Franzel has been reviewing its operations and plans to implement some changes in the budgeting and reporting for the manufacturing departments during the next fiscal year. The Molding Department is being reviewed first, and its cost and operating data for six months of the current fiscal year are presented in the following chart:

This information has been accumulated to assist in developing the manufacturing overhead budget for the coming year. These costs are traceable (direct) to the Molding Department except for a portion of the fixed costs and the equipment maintenance costs. The fixed costs include the common building and operating costs which are allo- cated to each of the manufacturing departments on the basis of square feet of space occupied. The Equipment Maintenance Department costs are charged to the operating de- partments for services rendered. These costs represent the actual costs of parts and supplies ($150,000 for the current fiscal year), plus a charge of $50 per hour. The manager of the Equipment Maintenance Department determines the preventive maintenance schedule for each of the production departments; all other repairs are made on a "first come, first served" basis. Management is comfortable with using the six-month data as the basis for the pre- liminary budget estimates because most of the activity measures and costs appear to be representative. However, the following adjustments will have to be made for the coming year:

In the past, the overhead application base in the Molding Department has been ma- chine hours for all costs. However, management has used scattergraphs to analyze the behavior of some costs and has concluded that more than one cost driver exist in this department. As shown in the scattergraph below, which captures data for the 12-month period through June of this year, the number of setups clearly represents the behavior of the setup costs and is now the application base for these costs. Similarly, the cost driver that is most appropriate as an application base for materials handling costs is pounds of materials processed. Machine hours will continue to be used as an application base for the remaining costs of the Molding Department. 

Jon Stein, vice-president of manufacturing, has indicated that he wants to employ a responsibility accounting system where each manufacturing department will be held ac- countable for all costs included in its manufacturing overhead budget. Actual monthly costs will be compared to the annual budget, and each department is expected to operate at or below budgeted monthly costs.

The numbers next to the points on the graph refer to the month of occurrence, i.e., January 1, etc.

Based on the production budgets, the activity measures for the Molding Department will be at the following levels for the coming fiscal year:

Transcribed Image Text:

Molding Department Manufacturing Overhead Activity Measures and Actual Costs Jan. Feb. March April May June Activity measures: Pounds of materials Machine hours Units produced 25,000 27,000 30,000 24,000 20,000 22,000 11,500 13,500 12,500 8,500 9,500 10,000 50,000 45,000 52,000 42,000 48,000 40,000 Machine setups. 15 20 16 18 19 21 Materials handling costs ($1.40/lb.) $ 35,000 $ 37,800 $ 42,000 $ 33,600 $ 28,000 $ 30,800 Setup costs... 11,500 15,250 12,000 14,000 14,500 22,750 Machine hour costs: Indirect labor ($5/machine hr.).. 57,500 67,500 62,500 42,500 47,500 50,000 Power ($0.20/kwhr.) 21,250 24,250 22,750 16,750 18,250 19,000 Equipment maintenance 15,000 18,000 12,000 19,000 16,000 35,000 Fixed costs. Total overhead... 335,000 335,000 335,000 335,000 335,000 335,000 $475,250 $497,800 $486,250 $460,850 $459,250 $492,550