Question

The Eastern Summit Company has prepared department overhead budgets for​ budgeted-volume levels before allocations as​ follows:

Support departments:
Building and grounds	$45,000
Personnel	7,800
General plant administration	36,120
Cafeteria: Operating loss	20,670
Storeroom	18,300	$127,890
Operating departments:
Machining	$36,000
Assembly	60,000	96,000
Total for support and operating departments		$223,890

Management has decided that the most appropriate inventory costs are achieved by using individual department overhead rates. These rates are developed after​ support-department costs are allocated to operating departments. Bases for allocation are to be selected from the​ following:

	Direct		Square Feet of	Indirect
	Manufacturing	Number of	Floor Space	Manufacturing	Number of
Department	Labor-Hours	Employees	Occupied	Labor-Hours	Requisitions
Building and grounds	0	0	0	0	0
Personnel*	0	0	2,500	0	0
General plant administration	0	40	12,000	0	0
Cafeteria: operating loss	0	10	4,500	3,000	0
Storeroom	0	5	6,000	2,000	0
Machining	10,000	55	22,000	13,000	10,000
Assembly	30,000	140	203,000	26,000	8,300
Total	40,000	250	250,000	44,000	18,300
*Basis used is number of employees

Requirements

1.	Using the​ step-down method, allocate​ support-department costs. Develop overhead rates per direct manufacturing​ labor-hour for machining and assembly. Allocate the costs of the support departments in the order given in this problem. Use the allocation base for each support department you think is most appropriate.
2.	Using the direct​ method, rework requirement 1.
3.	Based on the following information about two jobs determine the total overhead costs for each job by using rates developed in​ (a) requirement 1 and​(b) requirement 2.
4.	The company evaluates the performance of the operating department managers on the basis of how well they managed their total​ costs, including allocated costs. As the manager of the Machining​ Department, which allocation method would you prefer from the results obtained in requirements 1 and​ 2? Explain.

Answer 1

1

2

3

4 If the company evaluates the performance of the operating department managers on the basis of how well they managed their total​ costs, including allocated costs. As the manager of the Machining​ Department, Direct allocation method would you prefer from the results obtained in requirements 1 and​ 2 because the total overheads is less for machining department under direct method of overheads allocation.