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ADM 2341 Lecture 10: Untitled 5

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School
University of Ottawa
Department
Administration
Course
ADM 2341
Professor
Abdenour Slaouti

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Document Summary

Three different approaches are used to allocate service department costs: direct method. > most commonly used method for allocating total estimated service department cost because of its simplicity and ease of application. > service department costs are allocated directly to operating departments, ignoring any services rendered by service departments to each other: step method (sometimes referred to as either the sequential method or the step-down method) > first service department are allocated to all the other departments, and then closed and ignored in subsequent allocations. This procedure continues with the remaining service department until their complete allocation to both service and operating departments: reciprocal method (also referred to as the algebraic method, the simultaneous equations method, or the cross-allocation method) > allocates interdepartmental services by simultaneously assigning costs of one service department to another service department and vice versa e. g, > direct method allocates service department costs directly to operating departments, ignoring interdepartmental services.

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Related Questions

2) Broadway Department Store allocates the personnel and payroll department costs to the sales departments of Shoes, Automotive, and Clothing. Human resources (personnel) and payroll also provide services to each other. Personnel costs are allocated by number of employees and payroll costs are allocated by gross payroll. Costs and other information for January were as follows:

Personnel

Payroll

Shoes

Automotive

Clothing

Current Costs

$ 13,800

$ 6,400

$ 24,400

$ 40,000

$ 31,500

Gross Payroll

$ 3,000

$ 1,500

$ 5,600

$ 8,700

$ 4,050

Number of Employees

5

3

8

15

4

Required:

Prepare a schedule that includes the total cost of operating the sales departments for January. Allocate service costs using the step-down method with the sequence of allocation based on highest percentage support concept.

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.)

HI, I just have a simple or dum question. I am currently takingmanagerial accounting and we are learning the direct and stright-method of predetermined overhead rates. I found an example onlinebut for the DIRECT METHHOD I am not able to figureout where theratios are coming from and what they mean. I would greatlyappreciate the help. Thank You - Maria R.

I just need help with the Direct method question. I need to knowhow to get ratios.

1.

value:
50.00 points

Problem 4B-6 Step-Down Method versus Direct Method;Predetermined Overhead Rates [LO4-10, LO4-11]

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


FactoryAdministration $ 480,760
CustodialServices 116,260
Personnel 45,602
Maintenance 141,258
Machining—overhead 874,528
Assembly—overhead 1,181,192
Total cost $ 2,839,600
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 27 — 8,600 — —
CustodialServices 11 11,600 3,600 — —
Personnel 18 16,700 8,600 — —
Maintenance 54 44,500 16,000 — —
Machining 64 60,000 60,000 112,000 180,000
Assembly 96 150,000 20,000 227,000 36,000
270 282,800 116,800 339,000 216,000


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 290 28
AssemblyDepartment 15 84
Total hours 305 112


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.)