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FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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
Transcribed Image Text:P 7-5: a) Prepare a table showing how the $9.5 million would be allocated using each of the
four proposed allocation schemes (direct labor hours, direct labor dollars, direct material
dollars, and square footage of the two plants).
Texas
Direct labor hours
Direct labor dollars
Direct material dollars
Square footage
Allocated overhead based on:
Direct labor hours
Direct labor dollars
Direct material dollars
Square footage of plant
Mexico
Total
% Texas
b) Discuss the advantages and disadvantages of each of the four proposed allocation methods
(direct labor hours, direct labor dollars, direct material dollars, and square footage of the two
plants).

Transcribed Image Text:P 7-5: Massey Electronics
Massey Electronics manufactures heat sinks. Heat sinks are small devices attached to solid-state
circuit boards that dissipate the heat from the circuit board components. Made of aluminum, the
devices consist of many small fins cut in the metal to increase its surface area and hence its ability
to dissipate the heat. For example, Intel Pentium and Celeron processors are first mounted onto heat
sinks and then attached to circuit boards. These processors generate heat that will ultimately destroy
the processor and other components on the circuit board without a heat sink to disperse the heat.
Massey has two production facilities, one in Texas and the other in Mexico. Both produce a
wide range of heat sinks that are sold by the three Massey lines of business: laptops and PCs, serv-
ers, and telecommunications. The three lines of business are profit centers, whereas the two plants
are cost centers. Products produced by each plant are charged to the lines of business selling the heat
sinks at 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 that require tighter engineering toler-
ances. The Texas workforce is more skilled, but also more expensive. The Mexico plant is larger
and employs more people. Both facilities utilize a set of shared manufacturing resources: a common
manufacturing IT system that schedules and controls the manufacturing process, inventory control,
and cost accounting, industrial engineers, payroll processing, and quality control. These shared man-
ufacturing overhead resources cost Massey $9.5 million annually.
Massey is considering four ways to allocate this $9.5 million manufacturing overhead cost pool:
direct labor hours, direct labor dollars, direct material dollars, or square footage of the two plants.
The following table summarizes the operations of the two plants:
Direct labor hours
Direct labor dollars
Direct material dollars
Square footage
Texas
3,000,000
$60,000,000
$180,000,000
200,000
Mexico
4,000,000
$40,000,000
$200,000,000
300,000
Massey has significant tax loss carryforwards due to prior losses and hence expects no income tax
liability in any tax jurisdiction where it operates for the next five years.
Required:
a. Prepare a table showing how the $9.5 million would be allocated using each of the four
proposed allocation schemes (direct labor hours, direct labor dollars, direct material dol-
lars, and square footage of the two plants).
b. Discuss the advantages and disadvantages of each of the four proposed allocation methods
(direct labor hours, direct labor dollars, direct material dollars, and square footage of the
two plants).
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