Question

2. The Galaxy Company has two service departments (Power and maintenance) and two production departments (Machinery and Assembly). Additional information is given below: Kilowatt Maintenance Cost Hours Hours Machinery 450,000 39,000 1,600 Assembly 210.000 15,000 2,400 Power 135,000 5,500 1,000 Maintenance 90,000 6,000 600 Costs of Power department are allocated on the basis of Kilowatt Hours. The Costs of Maintenance department are allocated on the basis of Maintenance Hours. Total machine hours worked in Machinery Department is 2,500 and total direct labor hours worked in Assembly department is 1,000. Direct costs of Job order 501 are given as: Direct Material Cost 400,000 Direct Labor Cost 300,000 Job order 501 is processed 500 machine hours in Machinery Department and 250 labor hours in Assembly department. Required: 20 POINTS a) Allocate the total costs of the service departments to the producing departments by using step allocation method. b) Calculate total cost of Job order 501.

Answer 1

a) Step allocation method Service Department Power Maintenance $135,000 $90,000 Production Departments Machinery Assembly $450,000 $210,000 Departmental costs before allocations Allocation Power ( 6:39:15) Maintenance (16:24) Total Overheads $135,000 $0 $0 $13,500 -$103,500 $0 $87,750 $41,400 $579,150 $33,750 $62,100 $305,850 The cost of Power department is allocated first since it has highest overheads and renders highest service to maintenance department Machinery Department Total overheads Total machine hours Machine hour rate $579,150 a 2,500 6 $231.66 a/b Assembly Department Total overheads Total direct labor hours Direct labor hour rate $305,850 a 1,000 b $305.85 a/b $400,000 $300,000 b) Total cost of Job 501 Direct material Direct labor Overheads applied: Machinery Department Assembly Department Total cost $115,830 (500 *$231.66) $76,463 (250 *$305.85) $892,293