Question

Celestial Artistry Company is developing departmental overhead rates based on direct-labor hours for its two production departments, Etching and Finishing. The Etching Department employs 20 people and the Finishing Department employs 80 people. Each person in these two departments works 2,000 hours per year. The production-related overhead costs for the Etching Department are budgeted at $200,000, and the Finishing Department costs are budgeted at $320,000. Two service departments, Maintenance and Computing, directly support the two production departments. These service departments have budgeted costs of $48,000 and $250,000, respectively. The production departments’ overhead rates cannot be determined until the service departments’ costs are allocated. The following schedule reflects the use of the Maintenance Department’s and Computing Department’s output by the various departments.

	Using Department
Service Department	Maintenance			Computing			Etching			Finishing
Maintenance (maintenance hours)	0			1,000			1,000			8,000
Computing (minutes)	240,000			0			840,000			120,000

2. Use the step-down method to allocate service department costs. Allocate the Computing Department’s costs first. Calculate the overhead rates per direct-labor hour for the Etching Department and the Finishing Department. (Do not round intermediate calculations. Round "Overhead rate per hour" to 3 decimal places and other answers to the nearest dollar amount.)

Answer 1

Particulars			Maintenance	Computing	Etching	Finishing
Direct costs			$        48,000	$        2,50,000	$      2,00,000	$      3,20,000
Allocating the costs of:
Computing			$        50,000	$       -2,50,000	$      1,75,000	$          25,000
Balance			$        98,000	$                    -	$      3,75,000	$      3,45,000
Allocating the costs of:
Maintenance			$      -98,000	$                    -	$          10,889	$          87,111
Total cost after allocation					$      3,85,889	$      4,32,111
Total direct labor hours					40000	160000
OH rate per direct labor hour					$            9.647	$            2.701

Workings:

Allocating cost of Maintenance to:
Etching	$          10,889	($ 98000 x 1/9)
Finishing	$          87,111	($ 98000 x 8/9)
Allocating cost of Computing to:
Maintenance	$          50,000	($ 250000 x 24/120)
Etching	$      1,75,000	($ 250000 x 84/120)
Finishing	$          25,000	($ 250000 x 12/120)