Question

(Appendix 4B) Support Department Cost Allocation: Comparison of Methods of Allocation

Objective 6Bender Automotive Works Inc. manufactures a variety of front-end assemblies for automobiles. A front-end assembly is the unified front of an automobile that includes the headlamps, fender, and surrounding metal/plastic. Bender has two producing departments: Drilling and Assembly. Usually, the front-end assemblies are ordered in batches of 100.

EXCEL

Two support departments provide support for Bender's producing departments: Maintenance and Power. Budgeted data for the coming quarter follow. The company does not separate fixed and variable costs.

	Support Departments			Producing Departments
	Maintenance	Power		Drilling	Assembly
Overhead costs	$320,000	$400,000		$163,000	$90,000
Machine hours	—	22,500		30,000	7,500
Kilowatt-hours	40,000	—		36,000	324,000
Direct labor hours	—	—		5,000	40,000

The predetermined overhead rate for Drilling is computed on the basis of machine hours. Direct labor hours are used for Assembly.

Recently, a truck manufacturer requested a bid on a 3-year contract that would supply front-end assemblies to a nearby factory. The prime costs for a batch of 100 front-end assemblies are $1,817. It takes two machine hours to produce a batch in the drilling department and 50 direct labor hours to assemble the 100 front-end assemblies in the assembly department.

Bender's policy is to bid full manufacturing cost, plus 15%. (Note: Round allocation ratios to four decimal places, allocated support department cost to the nearest dollar, and the job cost components to the nearest cent.)

Required:

1. Prepare bids for Bender by using each of the following allocation methods: (a) direct method and (b) sequential method, allocating power costs first. (Note: Round allocation ratios to four decimal places, allocated support department cost to the nearest dollar, and the job cost components to the nearest cent.)

Answer 1

Answer A

Allocation using Direct Method Particulars Overhead costs Allocation of maintenance cost (based on machine hours) Allocation of power cost (based on kilo watt hours) Total Overhead cost Support department Producing department Maintenance Power Drilling Assembly $320,000 $400,000 $ 163,000 | $90,000 | ($320,000) $256,000 $64,000 ($400,000) $40,000 | $360,000 $0 $0 $459,000 $514,000 $128,500 Predetermined overhead rate for Drilling department = Total overhead cost / Total machine hours = $459000 / 30000 hours = $15.30 per machine hour Predetermined overhead rate for Assembly department = Total overhead cost / Total Direct Labor hours = $514000 / 40000 hours = $12.85 per direct labor hour Direct Method Bid for Bender by using direct Method Bender Automotive Works Inc. Particulars Prime Costs Drilling (2 machine hours * $15.30) Assembly (50 direct labor hours * $12.85) Total Cost Markup 15% Bid Price Amount $1,817.00 $30.60 $642.50 $2,490.10 $373.52 $2,863.62

Answer B

Allocation under sequential method Particulars Overhead costs Allocation of power cost (based on kilo watt hours) Allocation of maintenance cost (based on machine hours) Support department Maintenance Power $320,000 $400,000 $40,000 ($400,000 ($360,000)| Producing department Drilling Assembly $163,000 $90,000 $36,000 $324,000 $288,000 $72,000 Total Overhead cost $0 $0 $487,000 $486,000 Predetermined overhead rate for Drilling department = Total overhead cost / Total machine hours = $487000/30000 machine hours = $16.23 per machine hour Predetermined overhead rate for Assembly department = Total overhead cost / Total Direct Labor hours = $486000 / 40000 Direct Labor hours = $12.15 per direct labor hour Direct Method Bid for Bender by using sequential Method Bender Automotive Works Inc. Particulars Prime Costs Drilling (2 machine hours * $16.23) Assembly (50 direct labor hours * $12.15) Total Cost Markup 15% Bid Price Amount $1,817.00 $32.46 $607.50 $2,456.96 $368.54 $2.825.50