Question

The Sendai Co., Ltd., of Japan has budgeted costs in its various departments as follows for the coming year: Factory Administration Custodial Services 480,760 116,260 45,602 Personnel Maintenance 141,258 Machining-overhead Assembly-overhead Total cost 874,528 1,181,192 $2,839,600 The company allocates service department costs to other departments in the order listed below. Square Feet of Total Labor- Direct Number of Labor- Machine- Space Employees Hours Occupied Hours Department Factory Administration Custodial Services Hours 8,600 3,600 8,600 16,000 60,000 112,000 180,00 20,000 227,000 36,000 27 11 11,600 16,700 44,500 Personnel Maintenance Machining Assembly 18 54 60,000 150,000 64 96 270 282,800 116,800 339,000 216,000 Machining and Assembly are operating departments; the other departments are service departments. Factory Administration is allocated based on labor-hours; Custodial Services based on square feet occupied; Personnel based on number of employees, and Maintenance based on machine-hours. Required: 1. Allocate service department costs to consuming departments by the step-down method. Then compute predetermined overhead rates in the operating departments using machine-hours as the allocation base in Machining and direct labor-hours as the allocation base in Assembly 2. Repeat (1) above, this time using the direct method. Again compute predetermined overhead rates in Machining and Assembly. 3. Assume that the company doesn't bother with allocating service department costs but simply computes a single plantwide overhead rate that divides the total overhead costs (both service department and operating department costs) by the total direct labor-hours. Compute the plantwide overhead rate. 4. Suppose a job requires machine and labor time as follows:

Answer 1

1) Allocation of Service Dept cost using Step Down Method (Amounts in $)

	Factory Administration	Custodial Services	Personnel	Maintenance	Machining	Assembly
Departmental costs before allocation	480,760	116,260	45,602	141,258	874,528	1,181,192
Allocations:
Factory Administration (based on labor hours)	(480,760)	19,720 (480,760*11,600/282,800)	28,390 (480,760*16,700/282,800)	75,650 (480,760*44,500/282,800)	102,000 (480,760*60,000/282,800)	255,000 (480,760*150,000/282,800)
Custodial Services (based on square feet)	-	(135,980)	11,180 (135,980*8,600/104,600)	20,800 (135,980*16,000/104,600)	78,000 (135,980*60,000/104,600)	26,000 (135,980*20,000/104,600)
Personnel (Based on no. of employees)	-	-	(85,172)	21,492 (85,172*54/214)	25,472 (85,172*64/214)	38,208 (85,172*96/214)
Maintenance (Based on Machine hrs)				(259,200)	216,000 (259,200*180/216)	43,200 (259,200*36/216)
Total Allocated Overheads (a)	0	0	0	0	1,296,000	1,543,600
Allocation Base (b)					180,000 machine hrs	227,000 labor hrs
Predetermined overhead rate (a/b)					7.20 per machine hour	6.80 per labor hr

2) Allocation of Service Dept cost using Direct Method (Amounts in $)

	Factory Administration	Custodial Services	Personnel	Maintenance	Machining	Assembly
Departmental costs before allocation	480,760	116,260	45,602	141,258	874,528	1,181,192
Allocations:
Factory Administration (based on labor hours)	(480,760)				137,360 (480,760*60/210)	343,400 (480,760*150/210)
Custodial Services (based on square feet)	-	(116,260)			87,195 (116,260*60/80)	29,065 (116,260*20/80)
Personnel (Based on no. of employees)	-	-	(45,602)		18,240.80 (45,602*64/160)	27,361.20 (45,602*96/160)
Maintenance (Based on Machine hrs)				(141,258)	117,715 (141,258*180/216)	23,543 (141,258*36/216)
Total Allocated Overheads (a)	0	0	0	0	1,235,038.80	1,604,561.20
Allocation Base (b)					180,000 machine hrs	227,000 labor hrs
Predetermined overhead rate (a/b)					6.86 per machine hour	7.07 per labor hr

3) Plant wide Overhead rate = Total Overhead costs/Total Direct labor hours

= $2,839,600/339,000 hrs = $8.38 per labor hour

4) Calculation of Overhead Cost (Amounts in $)

	Overhead Cost
Step-Down Method	2,659 [(290 MH*$7.20)+(84 LH*$6.80)]
Direct Method	2,583 [(290 MH*$6.86)+(84 LH*$7.07)]
Plantwide Method	939 (112 labor hrs*$8.38)