Question

Direct Method

Eilers Company has two producing departments and two support departments. The following budgeted data pertain to these four departments:

	Support Departments		Producing Departments
	General Factory	Receiving	Assembly	Finishing
Direct overhead	$470,000	$180,000	$48,000	$76,000
Square footage	—	2,000	4,000	4,000
Number of receiving orders	370	—	1,600	1,500
Direct labor hours	—	—	26,000	50,000

The company has decided to simplify its method of allocating support service costs by switching to the direct method.

Required:

1. Allocate the costs of the support departments to the producing departments using the direct method. Round allocation ratios to four significant digits. Round allocated costs to the nearest dollar. Use the rounded values for subsequent calculations.

Allocation ratios:

	Assembly	Finishing
Square footage
Number of receiving orders
Allocations:
	Assembly	Finishing
General Factory	$	$
Receiving
Direct costs
Total	$	$

2. Using direct labor hours, compute departmental overhead rates. (Round to the nearest cent.)

	Overhead Rate
Assembly	per direct labor hour
Finishing	per direct labor hour

Answer 1

• All working forms part of the answer
• Requirement 1

	Assembly	Finishing
Square footage	0.5000 [ 4000/(4000 + 4000)]	0.5000 [ 4000/(4000 + 4000)]
Number of receiving orders	0.5161 [1600/(1600 + 1500)]	0.4839 [1500/(1600 +1500)]

• Requirement 2

Allocations
	Assembly	Finishing
General Factory	$235,000	$235,000
Receiving	$92,898	$87,102
Direct costs	$48,000	$76,000
Total	$375,898	$398,102

--Working

Allocations
	Assembly	Finishing
General Factory	=470000*0.5	=470000*0.5
Receiving	=180000*0.5161	=180000*0.4839
Direct costs	48000	76000

• Requriement 3

	Total Cost after allocation	no. of direct labor hours	Overhead Rate
Assembly	$375,898	26000	$                 14.46	per direct labor hour
Finishing	$398,102	50000	$                   7.96	per direct labor hour