Darrien Parks and Jaymes Parks, who are brothers, are the CEO and Controller, respectively, of their family-owned business, The Great Outdoors.The company has two divisions, Water Level Division and Sky%u2019s the Limit Division.The brothers have major concerns regarding both of the divisions.Each division has its own distinct issue. Below is a description of the concern in each.
Water Level Division
There are two main product lines manufactured at Water Level: [1] the Level-1 Speedboats and [2] the SS-super Speedboats. The Level-1 Speedboat requires the least amount of labor, but employs more expensive equipment. The SS-super Speedboat is handcrafted and quite labor-intensive. Currently, the Parks are [a] evaluating a few methods that result in the assignment of overhead costs to these products.
The brothers want to settle on an overhead cost allocation system. Overall, they desire to find a system that is not so intricate that the benefits of the system outweigh its costs.LaToye Lewis, assistant to Jaymes Parks, assembled production activities and their costs to assist the Parks in evaluating potential methods of assigning overhead.The estimated annual overhead activities and costs are:
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ACTIVITY
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COST
|
|
1
|
New Model Designs
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$363,300
|
|
2
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Prototypes: Creations and Testing
|
456,000
|
|
3
|
Speedboat mold development
|
565,500
|
|
4
|
Oven operation for Level-1 Speedboat (handcrafted)
|
120,000
|
|
5
|
Vacuum line operations for the SS-super Speedboat
|
84,000
|
|
6
|
Employee supervision (production)
|
540,000
|
|
7
|
Curing time (cost are primarily related to space used in production)
|
571,200
|
|
TOTAL COSTS
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$2,700,000
|
As Darrien and Jaymes investigate further and examine the information collected, they conclude that the (a) oven operation cost for the Level-1 and (b) the vacuum line operating costs for the SS-super Speedboats can be assigned directly to the product line.Accordingly, there is no need to allocate these costs along with the other costs.This information is critical to the evaluation of allocation methods.
Ms. Lewis later determined that Water Level incurs $702,000 in direct labor to product 3,000 SS-super Speedboats per year and $858,000 in direct labor is incurred to produce 12,000 Level-1 Speedboats per year.
Three potential allocation methodologies are currently being considered. You have been asked to prepare a report based on the information provided.This is your first project as an assistant to Darrien Parks.The three [3] allocation systems are discussed below:
[1]One method of assigning overhead is to allocate the common costs to each product line by using allocation bases such as the amount of factory space used for production of each type of speedboat or the number of employees working on each type of speedboat. Darrien has observed that approximately 60% of the space in the plant and 70% of the employees work on the SS-super Speedboat. The remaining employees and factory space are dedicated to the production of the Level-1 Speedboat. You are to determine the amount of overhead that should be assigned to each Level-1 Speedboat and to each SS-super Speedboat according to this method.
[2]The second method of allocating overhead costs is to base the allocation on direct labor dollars (these dollar amounts were mentioned earlier).The brothers emphasize the conclusion mentioned earlier that the (a) oven operation cost for the Level-1 and (b) the vacuum line operating costs for the SS-super Speedboats can be assigned directly to each product line. Accordingly, there is no need to allocate these costs along with the other costs.You are to determine the amount of overhead that should be assigned to each Level-1 Speedboat and to each SS-super Speedboat according to this method.