Question

Problem 4B-6 Step-Down Method versus Direct Method; Predetermined Overhead Rates [LO4-10, LO4-11] The Sendai Co., Ltd., of Japan has budgeted costsin its various departments as follows for the coming уear: Factory Administration Custodial Services 825,470 108,831 Personnel 28,970 60,569 633,098 865,282 $2,522,220 Maintenance Machining-overhead Assembly-overhead Total cost The company allocates service department coststo other departments in the order listed below. Square Feet of Total Direct Number of Labor Labor- Machine- Space Hours Occupied Employees Department Factory Administration Custodial Services Hours Hours 27 7,000 11,900 8,000 17,300 45,000 10 7,200 19,100 52,600 120,000 Personnel 24 Maintenance 59 Machining Assembly 76 61,000 140,800 35,200 114 160,000 15,000 235,000 310 358,900 104,200 296,000 176,000 Machining and Assembly are operating departments, the other departments are service departments. Factory Administration is allocated based on labor-hours, Custodial Services based on square feet occupied; Personnel based on number of employees, and Maintenance based on machine-hours. Required: 1. Allocate service department coststo consuming departments by the step-down method. Then compute predetermined overhead rates in the operating departments using machine-hours asthe allocation base in Machining and direct labor-hours as the allocation base in Assembly. 2. Repeat 1 above, this time using the direct method. Again compute predetermined overhead rates in Machining and Assembly.

Answer 1

		The Sendai co.
		Step Down Method
		Factory Administration	Custodial services	Personnel	Maintenance	Machining	Assembly
	Operating Department cost					$       6,33,098.00	$                             8,65,282.00
	Cost to be allocated	$                       8,25,470.00	$                          1,08,831.00	$    28,970.00	$        60,569.00
	Cost allocation
	Factory administration on the basis of $2.30 per direct labor hours	$                     -8,25,470.00	$                             16,560.00	$    43,930.00	$     1,20,980.00	$       2,76,000.00	$                             3,68,000.00
	Custodial service on the basis of 1.427 per square feet		$                        -1,25,391.00	$    11,760.00	$        25,431.00	$           66,150.00	$                                 22,050.00
	Personnel on the basis of 300.29 per employees)			$ -84,660.00	$        20,060.00	$           25,840.00	$                                 38,760.00
	Maintenance on the basis of $1.123 per machine hours				$   -2,27,040.00	$       1,81,632.00	$                                 45,408.00
	Total Overhead after allocation=(A)	$                                          -	$                                             -	$                   -	$                        -	$     11,82,720.00	$                           13,39,500.00
	Divide machining by machine hours and Assembly by direct labor hours=(B)					140800	235000
	Overhead Rate=(A)/(B)					$                      8.40	$                                           5.70
				(A)	(B)	(A)/(B)
			allocation base	Cost to be allocated	Total of allocation base
		Factory administration	Direct Labor Hours	825470	358900	2.3	Per direct Labor hours
		Custodial services	Square Feet	125391	85300	1.47	Per square feet
		Personnel	Number of employees	84660	249	340	Per employee
		Maintenance	Machine Hours	227040	176000	1.29	per machine hours
		The Sendai co.
		Step Down Method
		Factory Administration	Custodial services	Personnel	Maintenance	Machining	Assembly
	Operating Department cost					$       6,33,098.00	$                             8,65,282.00
	Cost to be allocated	$                       8,25,470.00	$                          1,08,831.00	$    28,970.00	$        60,569.00
	Cost allocation
*	Factory administration	$                     -8,25,470.00				$       3,53,772.86	$                             4,71,697.14
**	Custodial service on the basis of per square feet		$                        -1,08,831.00			$           81,623.25	$                                 27,207.75
***	Personnel on the basis of number of employees)			$ -28,970.00	$                        -	$           11,588.00	$                                 17,382.00
****	Maintenance on the basis of machine hours				$       -60,569.00	$           48,455.20	$                                 12,113.80
	Total Overhead after allocation=(A)	$                                          -	$                                             -	$                   -	$                        -	$     11,28,537.31	$                           13,93,682.69
	Divide machining by machine hours and Assembly by direct labor hours=(B)					140800	235000
	Overhead Rate=(A)/(B)					$                      8.02	$                                           5.93
		Machining	Assembly	Total
*	Direct Labor Hours	120000	160000	280000	Facory Administration
	Ratio	(120000/280000)	(160000/280000)
		0.428571429	0.571428571
**	Square feet of space occupied	45000	15000	60000	Custodial Service
	Ratio	(45000/60000)	(15000/60000)
		0.75	0.25
***	Number of Employees	76	114	190	Personnel
	Ratio	(76/190)	(114/190)
		0.4	0.6
****	Machine Hours	140800	35200	176000
	Ratio	(140800/176000)	(35200/176000)		Maintenance
		0.8	0.2
3)	Plant wide Overhead rate
	Total Overhead cost/Total Direct Labor hours
	($2522220/296000)=	8.5210	per direct labor hours
4)	Step Down Method
			(A)	(B)	(A)*(B)
		Base	Base Hours	Rate	Overhead cost
	Machining Department	Machine Hours	300	$               8.40	$           2,520.00
	Assembly Department	Direct Labor Hours	80	$               5.70	$              456.00
	Total Overhead Cost				$                 2,976
	Direct Method
			(A)	(B)	(A)*(B)
		Base	Base Hours	Rate	Overhead cost
	Machining Department	Machine Hours	300	$               8.02	$           2,404.55
	Assembly Department	Direct Labor Hours	80	$               5.93	$              474.45
	Total Overhead Cost				$                 2,879
	Plant wide overhead rate on the basis of direct labor hours
		(A)	(B)	(A)*(B)
		Total Direct labor Hours	Overhead rate per direct labor hour
		107	8.521013514	912