Current Attempt in Progress

Thomas$-$Britt Industries was founded by Matt Thomas in $1950$ as a small machine shop that produced parts for the aircraft industry.

The Korean War brought rapid growth to Thomas$-$Britt. By the end of the war, the company's annual sales had reached $$15$ million,

almost exclusively from government contracts. The next $40$ years brought slow but steady growth. Cost$-$reimbursement contracts

from the government continued to be the main source of revenue.

In the early $1990$ s$,$ president Will Thomas, son of the founder, realized that Thomas$-$Britt could not depend on government contracts

for long$-$term growth and stability. Consequently, he began planning for diversified commercial growth. By the end of $2003,$ Thomas$-$

Britt had succeeded in reducing government contract sales to $50\%$ of total sales.

Traditionally, the costs of the Materials Handling Department have been allocated to other departments as a percentage of the dollar

value of direct materials. Peter Anderson, manager of the government contracts unit, has been complaining about this allocation for

several months. He believes that since his unit's materials costs are high and materials handling activities are low relative to the

commercial unit, he is absorbing more than his fair share of this overhead. He wants to find a way to transfer some of these charges to

another unit, thereby increasing the government contracts unit's profltability and his year$-$end performance bonus.

Peter shared his views in a recent meeting with Sarah Lindley, the newly hired cost accounting manager, and Reese Mason, manager of

the commercial unit. After a heated discussion, Sarah agreed to investigate the current allocation method and, if appropriate,

recommend an alternative method.

After doing some research, Sarah learned the following:

The majority of the direct materials purchases for government contracts are high$-$dollar, low$-$volume purchases. Direct

materials purchases for commercial contracts are mostly low$-$dollar, high$-$volume purchases.

There are other departments that use the services of the Materials Handling Department on a limited basis, but they have

never been charged for materials handling costs.

One purchasing agent with a direct phone line is assigned exclusively to purchasing high$-$dollar, low$-$volume materials for

government contracts, at an annual salary of $$36,000.$ His employee benefits are estimated to amount to $20\%$ of his annual

salary. The dedicated phone line costs $$2,800$ a year.

The Materials Handling Department's budget for $2020,$ as proposed by Sarah Lindley's predecessor, follows.

Payroll

Employee benefits

Telephones

Other utilities

$$180,000$

$36,000$

$38,000$

$22,000$

Using the $2020$ estimates, she provided the following analysis to Anderson and Mason.

When Mason saw the projected increase in the commercial unit's costs, he exploded. He was not going to lose any of his year$-$end

performance bonus just because Lindley wanted to change the way she calculated the numbers. He marched into Lindley's office and

reminded her that he had been with the company for $25$ years and had "plenty of pull" with Thomas as a member of the senior

management team. He then told her to "adjust" her numbers and modify her recommendation so that the results would be more

favorable to the commercial unit. He added that since materials handling costs were only allocated to the government contract and

commercial units, she could just hide some of the commercial unit's purchase order volume in those other units.

Given her new position, Lindley is not sure how to proceed. She questions Mason's motivation. To complicate matters, Thomas has

asked her to prepare a three$-$year forecast of the two units' results, for which she believes the new allocation method would provide

the most accurate data. Using the new method would put her in direct opposition to Mason's directives, however.

Lindley has assembled the following forecasted data to project the units' direct materials handling costs.

Direct materials cost

$2020,2021,2022$

Purchase ordersAfter raviewing the situation, Lindley has recommended that a locating materials handling costs based on the number of purchase

orders issuad is preferable to the current allocation based on dirsct materials cost She satimated the number of purchase orders to

be processed in $2020$ as follows:

Using the $2020$ estimates, she provided the following analysis to Anderson and Mason.

When Mason saw the projected increase in the commarcial unit's coats, he exploded. He was not going to loce any of his year$-$end

performance bonus just because Lindlsy wanted to change the way she caleulated the numbers. He marched into Lindley's affice and

raminded her that he had bean with the company for $25$ years and had "planty of pull" with Thamas as a mam