The Gleason Company, a U.S. division of a large international company, has prepared estimated costs for next year that can be traced to each department as follows:

Building and grounds …………….    $ 41,010

Factory administration …………..      78,270

Cafeteria—operating loss ……….       4,920

Machining ……………………….            104,100

Assembly ………………………..            146,700

Total …………………………….             $375,000

Management would like to know the estimated total allocated product cost per unit. These costs will be used as a benchmark for future period operations. The following information is available and can be used as possible allocation bases. The difference between direct labor hours and total labor hours represents hours of supervisory labor or labor hours that are used indirectly for manufacturing. The cost of these hours in machining and assembly is part of manufacturing overhead.

REQUIRED

A. Allocate the building and grounds costs to all other departments using square feet. Add the allocated costs to direct costs to arrive at the total costs assigned to each department.

B. Explain whether each remaining department is a support or operating department. 

C. Select a reasonable allocation base for the costs of each support department. Justify your choices.

D. Compute allocated overhead costs for each operating department. Given the allocation bases you selected in part (C), allocate support department costs to each operating department using the step-down method. Then calculate an overhead rate per direct labor hour for each operating department.

E. Calculate overhead rates for the operating departments assuming that Gleason uses an average, plant-wide factory overhead allocation rate based on direct labor hours. That is, aggregate the support department overhead costs into one cost pool and use direct labor hours as the allocation base to determine the overhead rate per direct labor hour.

F. What causes the difference between the rates you calculated in parts (D) and (E)?

G. Assume that factory administration costs are allocated based on total labor hours and that the total allocated cost is used to charge other departments for administrative services. List one advantage and one disadvantage of this charge system.

H. Suppose that you are the manager of the machining department at Gleason. You can outsource some of your department’s work. Outsourcing would reduce direct labor hours and, therefore, reduce the amount of overhead allocated to your department. What factors should you consider in deciding whether to outsource?

I. Now suppose that you are the director of finance for Gleason. The manager of the machining department has decided to outsource some tasks. When you analyze the current period results, you notice that while direct labor costs decreased in machining, outsourcing costs are slightly higher this period than the prior period’s direct labor costs. When you ask the manager about these costs, he replies that the outsourcing does cost more than using direct labor, but because the amount of overhead for the department decreases, it is more profitable. What happened to the overhead that is no longer allocated to machining? Is the manager’s decision beneficial to Gleason Company as a whole? Explain.

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Number of Direct Labor Number of Square Total Labor Purchase Department Hours Employees Feet Hours Orders 500 1,000 3,500 5,000 10,000 500 Factory administration Cafeteria Machining Assembly Total 1,000 3,000 6,000 12,000 1,000 8,000 10,000 21,000 4,000 2,000 1,000 8,000 4