Question

The Wallaby Company has two support departments and two producing departments. Information for each department for the year is as follows:

                                         Support Departments         Producing    Departments

                                                Administration  Maintenance    Molding     Assembly

      Budgeted overhead         $80,000       $120,000              $460,000     $540,000

      Direct labor hours                 500          2,000                      25,000       32,000

      Square meter occupied         200            300                        2,500      10,000

      Machine hours                        —              500                          9,600     14,400

The company does not divide costs into fixed and variable components.

Plant administration costs are allocated based on square meter occupied, and factory maintenance costs are allocated based on machine hours.

Predetermined overhead rates for the producing departments are based on direct labor hours.

Required:(All answers should be supported by calculations; round to two decimal places)

a.   If the cost allocation is based on direct method, after the allocation, the total overhead of Molding and Assembly departments are:	(4 marks)
b. If the cost allocation is based on stepdown method starting with Administration, after the allocation, the total overhead cost of Molding and Assembly departments are:	(4 marks)
C. Based on your calculation at (b), the Calculate the predetermined overhead rate for the producing departments are:

Answer 1

Answer to Question 1:

Direct Method:

Support Department	Sum of Percentage	Molding	Assembly
Administration	25+100=125	25/125	100/125
Maintenance	96+144=240	96/240	144/240

We will multiply Service Department overheads by the above factors to obtain the amount of Overhead to be allocated to each Production Department.

Schedule allocating Support Department Cost to Producing Department using Direct Allocation Method:-

Department	Molding	Assembly	Administration	Maintenance
Allocated Overhead	460,000	540,000	80,000	120,000
Department Administration Allocation	16,000	64,000	-80,000
[80000*25/125]	[80000*100/125]
Department Maintenance Allocation	48,000	72,000		-120,000
[120000*96/240]	[120000*144/240]
Total:-	524,000	676,000	-	-

Note: Direct Method completely ignores Services provided by One Support Department to another Support Department

Answer to Question 2:

Step down Method of Allocation:

Schedule allocating Support Department Cost to Producing Department using Step Down  Allocation Method:-

Department	Molding	Assembly	Administration	Maintenance
Departmental Cost before allocation	460,000	540,000	80,000	120,000
Department Administration Allocation(Maintainenance-3/128, Molding-25/128, Assembly-100/128)	15,625	62,500	-80,000	1,875
[80000*25/128]	[80000*100/128]	[80000*3/128]
Department Maintenance Allocation( Molding-96/240, Assembly-144/240)	48,750	73,125		-121,875
[121875*96/240]	[121875*144/240]
Total:-(a)	524,375	675,625	-	-

Direct Labor Hours (b) 25,000 hours 32,000 hours

Predetermined OH Rate (a/b) 20.97 21.11

[Budgeted OH/Budget hrs]

Note: In this method, Highest of Support Department Cost is allocated first to all the remaining Support Department and Production Department. In the next step, the next maximum support department cost are allocated in the same manner till all support department Cost are allocated to Production Department.

Answer to c):

The predetermined overhead rate for the producing departments are:

Molding : $20.97

Assembly:$21.11