Question

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

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:

Support departments:
Building and grounds	$56,000
Personnel	1,140
General plant administration	14,040
Cafeteria: Operating loss	300
Storeroom	6,244	$77,724
Operating departments:
Machining	$34,000
Assembly	49,000	83,000
Total for support and operating departments		$160,724

Using the step-down method, allocate support-department costs. Allocate the costs of the support departments in the order given in this problem. (Round all indirect allocation rates to the nearest cent and all other computations to the nearest whole dollar. Use parentheses or a minus sign when decreasing departments by allocating costs.)

		Support Departments					Operating Departments
				General	Cafeteria
		Bldg and		Plant	Operating
		Grounds	Personnel	Admin.	Loss	Storeroom	Machining	Assembly
Costs incurred
Allocation of costs:
	Building and grounds
	Personnel
	General plant administration
	Cafeteria
	Storeroom
Total budgeted costs of operating departments

Develop overhead rates per direct manufacturing labor-hour for machining and assembly using the step-down method. (Round the overhead rates to three decimal places.)

Step-down method:					Overhead rate per direct
	Total costs allocated to department	/	Direct manufacturing labor-hours	=	manufacturing labor-hour
Machining		/		=
Assembly		/		=

Requirement 2. Using the direct method, rework requirement 1.

Using the direct method, allocate support-department costs. (Round cost allocations to the nearest whole dollar. Use parentheses or a minus sign when decreasing departments by allocating costs.)

		Support Departments					Operating Departments
				General	Cafeteria
		Bldg and		Plant	Operating
		Grounds	Personnel	Admin.	Loss	Storeroom	Machining	Assembly
Costs incurred
Allocation of costs:
	Building and grounds
	Personnel
	General plant administration
	Cafeteria
	Storeroom
Total budgeted costs of operating departments

Develop overhead rates per direct manufacturing labor-hour for machining and assembly using the direct method. (Round the overhead rates to three decimal places.)

Direct method:					Overhead rate per direct
	Total costs allocated to department	/	Direct manufacturing labor-hours	=	manufacturing labor-hour
Machining	$64,928	/	$	=	$
Assembly	$130,747	/	$	=	$

Requirement 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.

Start by computing the total overhead costs for each job using the rates developed in (a) requirement 1 (the step-down method.) (Round the total overhead costs to the nearest cent.)

(a) Step-down method:		Total
		Overhead Costs
Job 88:	Machining	$
	Assembly	$
	Total cost of Job 88	$
Job 89:	Machining	$
	Assembly	$
	Total cost of Job 89

Now compute the total overhead costs for each job using the rates developed in (b) requirement 2 (the direct method). (Round the total overhead costs to the nearest cent.)

(b) Direct method:		Total
		Overhead Costs
Job 88:	Machining
	Assembly
	Total cost of Job 88
Job 89:	Machining
	Assembly
	Total cost of Job 89

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 PrintDone Requirement 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 Begin by selecting the allocation base for each support department. Support Department Building and grounds Personne General plant administration Allocation Base Cafeteria: operating loss Storeroom

Answer 1

1	Step down method:
			Support departments					Production departments
		Allocation basis	Building and grounds	Personnel	General plant administration	Cafeteria: Operating loss	Storeroom	Machining	Assembly
	Costs		56000	1140	14040	-300	6244	34000	49000
	Building and grounds	Square feet of floor space Cost per square feet = 56000/400000 = 0.14 P: 9000*0.14; G:6000*0.14; C:6000*0.14; S:9600*0.14; M:48000*0.14; A:321400*0.14	-56000	1260	840	840	1344	6720	44996
	Personnel	Number of employees Cost per employee = (1140+1260)/300 = 8 G: 8*60; C:30*8; S:12*8; M:120*8; A:78*8		-2400	480	240	96	960	624
	General plant administration	Manufacturing labour hours Cost per manufacturing labour hour = 15360/19200 = 0.8 C:3000*0.8; S:2000*0.8; M:6000*0.8; A:8200*0.8			-15360	2400	1600	4800	6560
	Cafeteria: Operating loss	Square feet of flow space Cost per square feet = 3180/(9600+48000+321400) = 0.008 S: 9600*0.08; M:48000*0.08; A:321400*0.08				-3180	81	403	2697
	Storeroom	Number of requisitions Cost per requisition = 9365/5000 = 1.873 M:3000*1.873; A:2000*1.873					-9365	5619	3746
			0	0	0	0	0	52502	107623
	Overhead rate
	Step-down method:					Overhead rate per direct
		Total costs allocated to department	/	Direct manufacturing labor-hours	=	manufacturing labor-hour
	Machining	52502	/	4000	=	13.125
	Assembly	107623	/	12000	=	8.969
2	Direct method
			Support departments					Production departments
		Allocation basis	Building and grounds	Personnel	General plant administration	Cafeteria: Operating loss	Storeroom	Machining	Assembly
	Costs		56000	1140	14040	-300	6244	34000	49000
	Building and grounds	Square feet of floor space Cost per square feet = 56000/(48000+321400) = 0.1515 M: 48000*0.1515; A:321400*0.1515	-56000					7277	48723
	Personnel	Number of employees Cost per employee = 1140/(120+78) = 5.7575 M: 120*5.7575; A:78*5.7575		-1140				691	449
	General plant administration	Manufacturing labour hours Cost per manufacturing labour hour = 14040/(6000+8200) = 0.9887 M: 6000*0.9887; A:8200*0.9887			-14040			5932	8108
	Cafeteria: Operating loss	Square feet of flow space Cost per square feet = -300/(48000+321400) = 0.0008 M:48000*0.0008; A:321400*0.0008				300		-39	-261
	Storeroom	Number of requisitions Cost per requisition = 6244/(3000+2000)=1.24 M: 3000*1.24; A:2000*1.24					-6244	3746	2498
			0	0	0	0	0	51607	108517
	Overhead rate
	Direct method					Overhead rate per direct
		Total costs allocated to department	/	Direct manufacturing labor-hours	=	manufacturing labor-hour
	Machining	51607	/	4000	=	12.902
	Assembly	108517	/	12000	=	9.043
	a) Step-down method:		Total
			Overhead Costs ($)
	Job 88:	Machining	52501.7
		Assembly	107622.7
		Total cost of Job 88	160124.5
	b. Direct method
	Job 88:	Machining	51607
		Assembly	108517
		Total cost of Job 89	160124

As a manager, I would prefer step down method as the costs are well allocated to support departments and then to production departments