Tony Johnson, the new controller of Common Manufacturing Company (CMC) believes that the company should use the dual rate method of allocating overhead costs of its Materials Management Department to its Machining and Assembly Departments instead of the single rate method, which the company has used since its inception 20 years ago. Johnson's Materials Management Department has an annual capacity of 5,750 labor-hours and a budgeted fixed cost of $253,000. The budgeted variable cost per labor-hour of the Materials Management Department is $19. Johnson gathers the following information: (Click the icon to view the information.) Budgeted usage of Materials Management labor-hours Machining Assembly Department Department Total 1,350 4,150 5,500 Actual usage of Materials 950 3,650 4,600 Management labor-hours 1. 2. 3. Using the single-rate method, allocate Materials Management Department costs to the Machining and Assembly Departments in these three ways: a. Calculate the budgeted rate based on the budgeted number of Materials Management Department labor-hours and allocate costs based on the budgeted use of Materials Management labor-hours in the Machining and Assembly Departments. b. Calculate the budgeted rate based on the budgeted number of Materials Management Department labor-hours and allocate costs based on actual usage. c. Calculate the budgeted rate based on the practical capacity of Materials Management Department labor-hours and allocate costs based on actual usage. Using the dual-rate method, compute the amount allocated to the Machining and Assembly Departments when (a) the budgeted fixed-cost rate is calculated using budgeted fixed costs and practical capacity of the Materials Management Department, (b) fixed costs are allocated based on the budgeted fixed-cost rate and budgeted usage of Materials Management Department services by the Machining and Assembly Departments, and (c) variable costs are allocated using the budgeted variable-cost rate and actual usage. Comment on your results in requirements 1 and 2. Discuss the advantages of the dual-rate method. Requirement 1. Using the single-rate method, allocate Materials Management Department costs to the Machining and Assembly Departments in these three ways. Start with allocating (a), then (b), and finally (c). (Round the budgeted rate per item to the nearest cent.) Budgeted rate per item: Machining Assembly Total (a) (b) (c) 44 44 44 59400 41800 41800 182600 160600 160600 242000 202400 202400 Requirement 2. Using the dual-rate method, compute the amount allocated to the Machining and Assembly Departments when (a) the budgeted fixed-cost rate is calculated using budgeted fixed costs and practical capacity of the Materials Management Department, (b) fixed costs are allocated based on the budgeted fixed-cost rate and budgeted usage of Materials Management Department services by the Machining and Assembly Departments, and (c) variable costs are allocated using the budgeted variable-cost rate and actual usage. (Round the rate per item to the nearest cent.) Rate per item: Variable Fixed 44 Total Machining Assembly Total 1350 182600 Requirement 3. Comment on your results in requirements 1 and 2. Discuss the advantages of the dual-rate method. For each of the scenarios, identify the related allocation method. Scenario The costs of unused capacity of the Materials Management Department are not allocated to the Machining and Assembly Departments. Assuming that the budgeted labor-hours are based on honest estimates of their annual usage, this method will provide an estimate of the excess Materials Management Department capacity (the portion of Materials Management Department costs not charged to either the Machining or Assembly Department). This method suffers from the disadvantage that fixed costs of the Materials Management Department appear as variable costs to the Machining and Assembly Departments. The Machining Department and Assembly Department know at the start of the year the price per labor-hour in the Materials Management Department. This enables them to make operating decisions knowing the rate they will have to pay for materials management. Each can still control its total materials management costs by minimizing the number of Materials Management labor-hours each uses. Using the budgeted rate means that the costs of the unused capacity of the Materials Management Department is allocated to the Machining and Assembly Departments. The disadvantage is that fixed costs of the Materials Management Department appear as variable costs to the Machining and Assembly Departments. The Machining and Assembly Departments are unaffected by changes from its own budgeted usage or that of other divisions. The fixed costs of unused capacity in the Materials Management Department are not charged to the Machining and Assembly Departments. Of course, companies must ensure that managers do not systematically low-ball budgeted usage to reduce their allocations, for example by imposing penalties if managers want to use more resources than budgeted. Allocation method The Machining Department and Assembly Department know at the start of the year what they will be charged in total for overhead costs. In effect, the Materials Management Department costs becomes a fixed cost for the Machining and Assembly Departments. Then, each may be motivated to over-use the Materials Management Department, knowing that their current year transportation costs will not change. Single-rate method: Budgeted rate based on budgeted usage and Allocated using actual usage Single-rate method: Budgeted rate based on budgeted usage and Allocated using budgeted usage Single-rate method: Budgeted rate based on capacity and Allocated using actual usage Dual-rate allocation