Question

Celestial Artistry Company is developing departmental overhead rates based on direct-labor hours for its two production departments, Etching and Finishing. The Etching Department employs 20 people and the Finishing Department employs 80 people. Each person in these two departments works 2,000 hours per year. The production-related overhead costs for the Etching Department are budgeted at $200,000, and the Finishing Department costs are budgeted at $320,000. Two service departments, Maintenance and Computing, directly support the two production departments. These service departments have budgeted costs of $48,000 and $250,000, respectively. The production departments’ overhead rates cannot be determined until the service departments’ costs are allocated. The following schedule reflects the use of the Maintenance Department’s and Computing Department’s output by the various departments.

	Using Department
Service Department	Maintenance			Computing			Etching			Finishing
Maintenance (maintenance hours)	0			1,000			1,000			8,000
Computing (minutes)	240,000			0			840,000			120,000

1. 1-a. Use the direct method to allocate service department costs.
2. 1-b. Calculate the overhead rates per direct-labor hour for the Etching Department and the Finishing Department.
3. Use the step-down method to allocate service department costs. Allocate the Computing Department’s costs first. Calculate the overhead rates per direct-labor hour for the Etching Department and the Finishing Department. (Do not round intermediate calculations. Round "Overhead rate per hour" to 3 decimal places and other answers to the nearest dollar amount)
   

Answer 1

Solution Required 1-a.: Allocation of Service department cost to production department using direct method Under direct method, Service department cost is directly allocated to the production departments using the allocation base. In this method, no cost from one Service department to another Service department is allocated. This method is the simple method and ignores the services provided by one Service department to another Service department. Service Departments Production Departments Maintenance Computing Etching Finishing Direct Overhead Cost (a) $48,000 $250,000 $200,000 $320,000 Allocations: Maintenance ($48,000) $5,333 $42,667 ($48,000 x 1,000/9,000) ($48,000 x 8,000/9,000) Computing ($250,000) $218,750 $31,250 ($250,000 x 840,000/960,000) ($250,000 x 120,000/960,000) $224,083 $73,917 Total Service Department costs allocated (b) Total overhead costs after allcoation (a+b) $424,083 $393,917 Required 1-b.: Computation of overhead rates per direct-labor hour for the Etching Department and the Finishing Department Step-1: Compute the total direct labor hours available in each Production departments Etching Finishing 80 Number of employees in the department (a) Number of Hours worked by each employee per year (b) Total direct labor hours available (a x b) 20 2,000 40,000 2,000 160,000 Step-2: Compute the overhead rates per direct labor hour Etching Finishing Total overhead costs after allocation from service department Total direct labor hours available (step-1) Overhead rate per direct labor-hour $424,083 40,000 $10.602 $393,917 160,000 $2.462 Etching $10.6021 Finishing $2.462 Overhead rate per direct labor-hour

Required 2-a.: Allocation of Service department cost to production department using step-down method Step-down method is a method of allocating the Service department cost to the production departments and other Service department in a sequential manner. In this method the ranking of allocating the Service department cost is assigned based on the largest portion of cost consumed by the other Service departments i.e. the department which has the largest portion of its costs consumed by other Service department gets the first rank and so on. Once the cost of a department is allocated to other departments, that department is excluded while allocating cost of other departments. Thus in a sequential step down manner, all the Service department cost is allocated to the production departments. Service Departments Production Departments Computing Maintenance Etching Finishing Direct Overhead Cost (a) $250,000 $48,000 $200,000 $320,000 Allocations: Computing ($250,000) $50,000 $175,000 $25,000 ($250,000 x 240,000/1,200,000) ($98,000) ($250,000 x 840,000/1,200,000) $10,889 ($98,000 x 1,000/9,000) ($250,000 x 120,000/1,200,000) $87,111 Maintenance ($98,000 x 8,000/9,000) Total Service Department costs allocated (b) $185,889 $112,111 Total overhead costs after allcoation (a + b) $385,889 $432,111 Required 2-b.: Computation of overhead rates per direct-labor hour for the Etching Department and the Finishing Department Etching Finishing Total overhead costs after allocation from service department Total direct labor hours available Overhead rate per direct labor-hour $385,889 40,000 $9.647 $432,111 160,000 $2.701 Overhead rate per direct labor-hour Etching $9.647 Finishing $2.701