The president of MacDonald Inc., has asked the Controller, Laura Spence, to review the way the company is costing its products. The company uses manufacturing cost as a basis for setting prices and has determined that overall, the selling prices of its products seem to be out of line with the prices of competitors. For example, the very popular Black Diamond model is priced much lower than competitors whereas all other models are priced well above the products of competitors. As a result, profits are declining along with sales for some models. The president has a gut feeling that this all has something to do with how the ski boards are costed in comparison with competitors). The company currently uses a single plant-wide rate to charge overhead to the various company products. This method no longer seems to be providing the precision needed in determining costs and setting prices. Ms. Spence has therefore called together your group, the Special Analysis Group (part of the Accounting Department), to look into other possibilities for charging overhead to the products. In particular, she wants your group to explore another alternative-----the direct method of allocating service department costs to specific operating departments and to allocate variable and fixed costs separately. She wants your analysis to focus on one product line in particular, the Double Black Model. She asks you to complete the analysis in the form of a long memo and submit it to her. It should include the following items: 1. A schedule showing the calculation for the current single plant wide overhead rate and the related overhead cost for the Black Diamond model. 2. A schedule showing the calculations using a separate overhead rate for each department assuming the direct method is used and assuming separate allocations for variable and fixed costs. Assume the fixed overhead is allocated based on the percentage of peak-period requirements. In computing the rates, use a machine- hours basis in the Finishing Department and a direct labour hours basis in the other two departments. 3. Determine the overhead cost in total for the Black Diamond Model in each department and in total for all departments. MacDonald Inc. manufactures and markets a complete line of ski boards. MacDonald has three manufacturing departments-Moulding. Assembly, and Finishing and two service departments Physical Resources and Human Resources. The basic fiberglass boards are fabricated in the Moulding Department. Fittings are attached to the boards in the Assembly Department. The boards are painted, surfaces are sanded and polished, and the completed boards are packed in the Finishing Department. Varying amounts of materials, time and effort are required for each of the various ski boards produced by the company. The Physical Resources and Human Resources provide services to the manufacturing departments MacDonald has always used a plantwide overhead rate. Direct labour hours are used to assign the overhead to products. The overhead rate is computed by dividing the company's total estimated overhead cost by the total estimated direct labour hours to be worked in the three manufacturing departments. Sarah Lane, the manager of cost accounting has recommended that the company use department overhead rates rather than a single, plantwide rate. Planned operating costs and expected levels of activity for the coming year have been developed by Sarah and are presented below: Service Department Costs Physical Human Resources Resources $ 60,000 $ 8.000 140,000 78.000 Variable Costs Fixed Costs Total service department costs $200,000 $86,000 Moulding Assembly Finishing Departmental activity measures: Direct labour hours Machine hours 10,000 0 40.000 8,000 30,000 50,000 Department costs: Raw materials Direct labour Variable overhead Fixed overhead Total department costs $ 800.000 150,000 100,000 1.200,300 $2.250.300 $2,000,000 $ 100.000 600,000 450,000 200,000 50,000 702.300 597,400 $3,502,300 $1,197,400 CMAII 2 Manufacturing Department Moulding Assembly Finishing Use of service departments Physical Resources Estimated physical resources hours Percentage of peak-period requirements 4,000 50% 3,000 35% 1,000 15% Human Resources Estimated human resources hours Percentage of peak-period requirements 200 600 40% 800 45% 15% Assume that the Double Black ski board has the following annual requirements for machine time and direct labour time in the various departments Machine Hours Moulding Department Assembly Department Finishing Department Total hours 0 200 1,500 1,700 Direct Labour Hours 500 1,000 800 2,300 Prepare the memo and related schedules for Ms. Spence. Normal case format should be followed