Massey Electronics manufactures heat sinks. Heat sinks are smalldevices attached to solid-state circuit boards that dissipate theheat from the circuit board components. Made of aluminum, thedevices consist of many small fins cut in the metal to increase itssurface area and hence its ability to dissipate the heat. Forexample, Intel Pentium and Celeron processors are first mountedonto heat sinks and then attached to circuit boards. Theseprocessors generate heat that will ultimately destroy the processorand other components on the circuit board without a heat sink todisperse the heat.
Massey has two production facilities, one in Texas and the otherin Mexico. Both produce a wide range of heat sinks that are sold bythe three Massey lines of business: laptops and PCs, servers, andtelecommunications. The three lines of business are profit centers,whereas the two plants are cost centers. Products produced by eachplant are charged to the lines of business selling the heat sinksat full absorption cost, including all manufacturing overheads.Both plants supply heat sinks to each line of business.
The Texas plant produces more complicated heat sinks thatrequire tighter engineering tolerances. The Texas workforce is moreskilled, but more expensive. The Mexico plant is larger and employsmore people. Both facilities utilize a set of shared manufacturingresources: a common manufacturing IT system that schedules andcontrols the manufacturing process, inventory control, and costaccounting, industrial engineers, payroll processing, and qualitycontrol. These shared manufacturing over resources cost Massey $9.5million annually.
Massey is considering four ways to allocate this $9.5 millionmanufacturing overhead cost pool: direct labor hours, direct labordollars, direct material dollars, or square footage of the twoplants.
The following table summarizes the operations of the twoplants:
Texas Mexico Direct Labor Hours 3,000,000 4,000,000 Direct Labor Dollars $60,000,000 $40,000,000 Direct Material Dollars $180,000,000 $200,000,000 Square Footage 200,000 300,000
Massey has significant tax loss carryforwards due to priorlosses and hence expects no income tax liability in any taxjurisdiction where it operates for the next five years.
1. Read the problem and submit a table that includes theinformation in the table presented below.
Method of Allocation Amount of $9.5 Million Allocated to Texas Amount of $9.5 Allocated to Mexico Direct Labor Hours Direct Labor Dollars Direct Material Dollars Square Footage
2. Massey allocates a share of the overhead cost pool tothe plant in Mexico. If Mexico has a lower tax rate than the UnitedStates, which method of allocation should Massey choose if the goalis to lower taxes payable?
3. If the bonus of the plant manager in Texas iscomputed on the basis of reducing costs attributed to the Texasplant after the allocation for the overhead cost pool, which methodof allocation would result in the greatest bonus for the manager ofthe Texas plant?
Massey Electronics manufactures heat sinks. Heat sinks are smalldevices attached to solid-state circuit boards that dissipate theheat from the circuit board components. Made of aluminum, thedevices consist of many small fins cut in the metal to increase itssurface area and hence its ability to dissipate the heat. Forexample, Intel Pentium and Celeron processors are first mountedonto heat sinks and then attached to circuit boards. Theseprocessors generate heat that will ultimately destroy the processorand other components on the circuit board without a heat sink todisperse the heat.
Massey has two production facilities, one in Texas and the otherin Mexico. Both produce a wide range of heat sinks that are sold bythe three Massey lines of business: laptops and PCs, servers, andtelecommunications. The three lines of business are profit centers,whereas the two plants are cost centers. Products produced by eachplant are charged to the lines of business selling the heat sinksat full absorption cost, including all manufacturing overheads.Both plants supply heat sinks to each line of business.
The Texas plant produces more complicated heat sinks thatrequire tighter engineering tolerances. The Texas workforce is moreskilled, but more expensive. The Mexico plant is larger and employsmore people. Both facilities utilize a set of shared manufacturingresources: a common manufacturing IT system that schedules andcontrols the manufacturing process, inventory control, and costaccounting, industrial engineers, payroll processing, and qualitycontrol. These shared manufacturing over resources cost Massey $9.5million annually.
Massey is considering four ways to allocate this $9.5 millionmanufacturing overhead cost pool: direct labor hours, direct labordollars, direct material dollars, or square footage of the twoplants.
The following table summarizes the operations of the twoplants:
| Texas | Mexico | |
| Direct Labor Hours | 3,000,000 | 4,000,000 |
| Direct Labor Dollars | $60,000,000 | $40,000,000 |
| Direct Material Dollars | $180,000,000 | $200,000,000 |
| Square Footage | 200,000 | 300,000 |
Massey has significant tax loss carryforwards due to priorlosses and hence expects no income tax liability in any taxjurisdiction where it operates for the next five years.
1. Read the problem and submit a table that includes theinformation in the table presented below.
| Method of Allocation | Amount of $9.5 Million Allocated to Texas | Amount of $9.5 Allocated to Mexico |
| Direct Labor Hours | ||
| Direct Labor Dollars | ||
| Direct Material Dollars | ||
| Square Footage |
2. Massey allocates a share of the overhead cost pool tothe plant in Mexico. If Mexico has a lower tax rate than the UnitedStates, which method of allocation should Massey choose if the goalis to lower taxes payable?
3. If the bonus of the plant manager in Texas iscomputed on the basis of reducing costs attributed to the Texasplant after the allocation for the overhead cost pool, which methodof allocation would result in the greatest bonus for the manager ofthe Texas plant?
