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(Appendix 4B) Direct Method of Support Department Cost Allocation Stevenson Company is divided into two operating...

(Appendix 4B) Direct Method of Support Department Cost Allocation

Stevenson Company is divided into two operating divisions: Battery and Small Motors. The company allocates power and general factory costs to each operating division using the direct method. Power costs are allocated on the basis of the number of machine hours and general factory costs on the basis of square footage. Support department cost allocations using the direct method are based on the following data:

Support Departments Operating Divisions

Power		 General Factory
Battery		 Small Motors
Overhead costs $160,000 $430,000 $163,000 $84,600
Machine hours 2,000 2,000 7,000 3,000
Square footage 1,000 1,500 10,000 20,000
Direct labor hours 18,000 60,000

Required:

1. Calculate the allocation ratios for Power and General Factory. (Note: Carry these calculations out to four decimal places, if necessary.)

Power General Factory
Battery
Small Motors

2. Allocate the support service costs to the operating divisions. Round all amounts to the nearest dollar. Use a minus sign to indicate a subtraction. For those boxes in which no entry is required, leave the box blank or enter zero ("0").

Support Departments Operating Divisions
Power General Factory Battery Small Motors
Direct costs $ $ $ $
Allocate:
    Power
    General Factory
Total $ $ $ $

3. Assume divisional overhead rates are based on direct labor hours. Calculate the overhead rate for the Battery Division and for the Small Motors Division. Round your answers to the nearest cent.

Battery overhead rate $
Small Motors overhead rate $

PLEASE EXPLAIN STEP BY STEP. THANK YOU!

Solutions

Expert Solution

  • Requirement 1

Direct method is to be used so allocation base of ONLY Operating division will be considered:

Power [7000 + 3000 = 10000 machine hours]

General factory [10000 + 20000 = 30000 sq feet]

Battery

0.7000

0.3333

[7000/10000]

[10000/30000]

Small Motors

0.3000

0.6667

[3000/10000]

[20000/30000]

  • Requirement 2

Power

General Factory

Battery

Small Motors

Direct Cost

$160,000

$430,000

$163,000

$84,600

Allocate:

Power

($160,000)

$112,000 [160000 x0.7000]

$48,000 [160000 x 0.3000]

General factory

($430,000)

$143,319 [430000 x 0.3333]

$286,681 [430000 x 0.6667]

Total

$0

$0

$418,319

$419,281

  • Requirement 3

Total Overhead after allocation

Tota Direct Labor hours

Overhead rates = Answer

Battery

$418,319

                                                                18,000

$                                23.24

Small Motors

$419,281

                                                                60,000

$                                  6.99

ekkarill92 answered 6 months ago
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