Question

ACC 650 - REVISED PROBLEM 17-26 - QUESTION #1

Celestial Artistry Company is developing departmental overhead rates based on direct-labor hours   
for its two production departments, Finishing and Etching. The Finishing Department employs       
120 people and the Etching Department employs 60 people. Each person in these two departments   
works 1,500 hours per year. The production-related overhead costs for the Finishing Department are   
budgeted at $330,000, and the Etching Department costs are budgeted at $280,000. Two service       
departments, Maintenance and Computing, directly support the two production departments. These   
service departments have budgeted costs of $36,000 and $310,000, 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	Finishing	Etching
Maintenance (maintenance hours)	-	2,000	9,000	3,000
Computing (minutes)	180,000	-	130,000	620,000

REQUIRED:

1. Use the direct method to allocate service department costs. Calculate the overhead rates per direct-labor hour for the Finishing Department and the Etching Department.

Answer 1

Under the direct method, the service department costs are allocated to the production departments in the ratio in which the service department supports the production depratments.
Particulars	Maintenance	Computing	Finishing	Etching
Maintenance department cost	$36,000
Less: Allocation of maintenance department cost (Note 1)	-$36,000		$27,000	$9,000
Computing department cost	$3,10,000
Less: Allocation of computing department cost (Note 2)	-$3,10,000		$53,733	$2,56,267
Cost of own department			$3,30,000	$2,80,000
Total overheads (A)			$4,10,733	$5,45,267
Direct labor hours (B) - No. of people employed x 1,500 hours per person			1,80,000	90,000
Overhead rate per direct labor hour (A / B)			$2.28	$6.06
Note 1: Allocation of maintenance department cost
Particulars	Finishing	Etching	Total
Maintenance hours	9,000	3,000	12,000
Allocation ($36,000 x 9,000 hours / 12,000 hours)	$27,000		$27,000
Allocation ($36,000 x 3,000 hours / 12,000 hours)		$9,000	$9,000
			-
Note 2: Allocation of computing department cost
Particulars	Finishing	Etching	Total
Computing minutes	1,30,000	6,20,000	7,50,000
Allocation ($310,000 x 130,000 mins / 750,000 mins)	$53,733		$53,733
Allocation ($310,000 x 620,000 mins / 750,000 mins)		$2,56,267	$2,56,267