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Problem: Magee Engineering (Service Department Cost Allocation) Budgeted cost data for the production and service departments of Magee Engineering are as follows:

Machining $ 400,000

Assembly 200,000

Plant Maintenance 600,000

Information Systems 116,000

Total $1,316,000

Of its 8,000 budgeted direct labor hours, Plant Maintenance plans to spend 1,600 direct labor hours furnishing service to Information Systems, 2,400 direct labor hours for Machining, and 4,000 for Assembly. Of its 2,000 hours of budgeted computer time, Information Systems plans to spend 200 computer hours on work for Plant Maintenance, 1,600 computer hours for Machining, and 200 computer hours for Assembly.

Required: (1) Determine the costs allocated to the production departments using the direct method and the reciprocal method

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Lelia Lubowitz
Lelia LubowitzLv2
28 Sep 2019

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POCHTAR CORPORATION

The POCHTAR CORPORATION had used a single plant-wide rate to determine its predetermined overhead rate at the beginning of the year, but it has now decided that the most appropriate method is to use two individual department overhead rates, one for the Machining Department and one for the Assembly Department. In computing the predetermined overhead rate(s), whether a single plant wide rate is used or whether two department overhead rates are used, direct labor hours is used as the cost driver for the operating departments.

At the beginning of the year the POCHTAR CORPORATION has prepared individual department overhead budgets, before any allocations, and identified cost drivers for the departments listed below:

DEPARTMENT OVERHEAD BUDGETS

Support Departments:

Building and grounds (cost driver: square feet) $12,000

Personnel (cost driver: employees) 1,200

General plant administration (cost driver: manufacturing hours) 25,000

Operating Departments:

Machining $35,500

Assembly 46,300

BUDGETED AMOUNT OF EACH COST DRIVER

The budgeted amounts for each cost driver per department are given below:

Department Direct labor hrs. Employees Square feet Manuf. hours

Building & Grounds 0 0 0 0

Personnel 0 0 12,000 0

General plant 0 35 8,000 0

Machining 5,000 50 30,000 8,000

Assembly 15,000 100 50,000 17,000

REQUIRED:

What is the predetermined overhead rate using a single plant-wide rate? If necessary, round to the nearest cent.

What are the two predetermined overhead department rates, using the direct method of allocating support costs to the operating departments. ? If necessary, round to the nearest cent.

What are the two predetermined overhead department rates, using the step method of allocating support costs to the operating departments. ? If necessary, round to the nearest cent.

Based on the following information about two jobs, A and B, determine the total overhead costs for each job by using (1) the single plant-wide rate computed in question 1 above and (2) two predetermined overhead rates using the direct method of allocating support costs to the operating departments computed in question 2 above. Very briefly explain which method makes more sense. Please do not simply say that one method is more accurate than the other.

Direct Labor Hours:

Machining Department Assembly Department

Job A 18 2

Job B 3 17

The Sendai Co., Ltd., of Japan has budgeted costs in its variousdepartments as follows for the coming year:


FactoryAdministration $ 994,245
CustodialServices 202,335
Personnel 28,650
Maintenance 122,120
Machining—overhead 921,900
Assembly—overhead 277,525
Total cost $ 2,546,775
The companyallocates service department costs to other departments in theorder listed below.
Department Numberof
Employees		 Total
Labor-
Hours		 Square
Feet of
Space
Occupied		 Direct
Labor-
Hours		 Machine-
Hours
FactoryAdministration 22 — 10,800 — —
CustodialServices 15 7,000 7,200 — —
Personnel 12 15,000 3,300 — —
Maintenance 51 47,900 19,800 — —
Machining 30 80,000 100,000 56,000 183,750
Assembly 120 240,000 40,000 216,000 61,250
250 389,900 181,100 272,000 245,000


Machining and Assembly are operating departments; the otherdepartments are service departments. Factory Administration isallocated on the basis of labor-hours; Custodial Services on thebasis of square feet occupied; Personnel on the basis of number ofemployees; and Maintenance on the basis of machine-hours.


Required:
1.

Allocate service department costs to consuming departments bythe step-down method. Then compute predetermined overhead rates inthe operating departments using a machine-hours basis in Machiningand a direct labor-hours basis in Assembly. (Please enterallocations from a department as negative and allocations to adepartment as positive. The line should add across to zero. Do notround intermediate calculations. Round "Predetermined overheadrates" to 2 decimal places and other answers to the nearest wholedollar amount.)


2.

Allocate service department costs to consuming departments bythe direct method. Again, compute predetermined overhead rates inMachining and Assembly. (Please enter allocations from adepartment as negative and allocations to a department as positive.The line should add across to zero. Do not round intermediatecalculations. Round "Predetermined overhead rates" to 2 decimalplaces and other answers to the nearest whole dollaramount.)


3.

Assume that the company doesn’t bother with allocating servicedepartment costs but simply computes a single plantwide overheadrate based on total overhead costs (both service department andoperating department costs) divided by total direct labor-hours.Compute the plantwide overhead rate. (Round your answer to2 decimal places.)


4. Suppose a job requires machineand labor time as follows:
Machine-Hours Direct
Labor-Hours
MachiningDepartment 270 26
AssemblyDepartment 11 77
Total hours 281 103


Compute the amount of overhead cost that would be assigned tothe job if the overhead rates were developed using the stepdownmethod, the direct method, and the plantwide method. (Roundintermediate calculations to 2 decimal places and finalcalculations to the nearest whole dollar.)

Question 4: Service department costallocation

Inns Battery Company has two service departments: Maintenanceand Personnel. Maintenance Department costs are allocated on thebasis of budgeted maintenance-hours. Personnel Department costs areallocated based on the number of employees. Data on budgetedmaintenance-hours and number of employees are as follows:

Support Departments

Production Departments

Maintenance Department

Personnel Department

A

B

Budgeted costs

$180,000

$30,000

$80,000

$120,000

Budgeted maintenance-hours

n/a

240

720

240

Number of employees

20

n/a

60

120

Required:

4a. Using the direct method, determine the amount of supportdepartment costs to be allocated to Production Department A.

4b. Using the step-down method, determine the amount ofMaintenance Department costs to be allocated to ProductionDepartment A, if the service department with the highest percentageof interdepartmental support service is allocated first.

4c. Using the reciprocal method, determine the amount ofmaintenance department costs to be allocated to ProductionDepartment A (round up to nearest dollar).

4d. List and explain two possible reasons why a manager mightprefer that budgeted rather than actual cost-allocation rates beused when cost is being allocated to his/her department fromanother department. Use the textbook and/or other relevantresources to support your answer.

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