Question

Anderson Enterprises has three service departments, Administration, Maintenance and security and two production departments, Machining and Assembly. Total Manufacturing overhead was either directly traced or allocated to all of the departments resulting gin a total of $300,000 of overhead in the Maintenance Department, $240,000 in the administration department, $135,000 in the security department, $1,000,000 in the machining department and $300,000 in the assembly department. The company allocates service department cost using the step method. The maintenance department overhead is allocated first using number of maintenance hours followed by the administration department based on number of employees and the security department is allocated last on the basis of square footage.

Administration Security Maintenance   Machining Assembly

Square Footage 4,000 1,000 2,000 12,000 8,000

Number of Employees 3 2 4 6 8

Direct Labor Hours 0 0 0 12,000 16,000

Machine Hours 0 0 500 2,400 800

Maintenance Hours 700 300 0 2800 1200

1.) Allocate service department costs to the production departments using the step method of service department allocations.

2.) Develop departmental overhead rates for the production department using machine hours in the machining department and labor hours in the assembly department.

Answer 1

1) Statement Showing allocation of service department costs to the production department using the step method of service department allocations:

Particulars	Machining ($)	Assembly ($)	Maintenance ($)	Administration ($)	Security ($)
Total Manufacturing Overheads	1000000	300000	300000	240000	135000
Allocation of Maintenance Dept cost to other depts. in the ratio (7:3:0:28:12)	42000	12000	- 300000	168000	72000
Sub - Total	1042000	312000	NIL	408000	207000
Allocation of Administration Dept. Cost to Other Depts. in the ratio (3:2:0:0:8)	94154	62770	NIL	-408000	251076
Sub - Total	1136154	374770	NIL	NIL	458076
Allocation of Security Dept. Cost to Other Depts. in the ratio (4:1:0:0:0)	366461	91615
Total	1502615	466385	NIL	NIL	NIL

2) Departmental Overhead Rates for the production department :

Machining Department Overhead Rate = Total cost of machining dept. / Machine hours:

Overhead Rate = $ 1502615 / 2400 = $ 626.09

Assembly Department Overhead Rate = Total cost of assembly dept. / Labor hours:

Overhead Rate = $ 466385 / 16000 = $ 29.15