Question

Direct Method and Overhead Rates

Jasmine Company manufactures both pesticide and liquid fertilizer, with each product manufactured in separate departments. Three support departments support the production departments: Power, General Factory, and Purchasing. Budgeted data on the five departments are as follows:

	Support Departments			Producing Departments
	Power	General Factory	Purchasing	Pesticide	Liquid Fertilizer
Overhead	$90,000	$314,000	$169,000	$78,500	$107,400
Square feet	1,500	—	1,500	4,200	4,800
Machine hours	—	1,403	1,345	24,000	8,000
Purchase orders	20	40	7	120	60

The company does not break overhead into fixed and variable components. The bases for allocation are power—machine hours; general factory—square feet; and purchasing—purchase orders.

Required:

1. Allocate the overhead costs to the producing departments using the direct method. If required, round your allocation ratios to four decimal places and round allocated costs to the nearest dollar and use the rounded values for the subsequent calculations.

Cost assignment:

	Pesticide	Liquid Fertilizer
Direct costs	$	$
Power
General Factory
Purchasing
Total	$	$

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

	Departmental overhead rates
Pesticide	$ per machine hour
Liquid Fertilizer	$ per machine hour

Answer 1

1. Cost assignment:

The bases for allocation are power—machine hours; general factory—square feet; and purchasing—purchase orders.

i) Power department cost = $90,000

Power department cost allocated to Pesticide department = 90,000 x 24,000/32,000

= $67,500

Power department cost allocated to Liquid fertilizer department = 90,000 x 8,000/32,000

= $22,500

ii) General factory department cost = $314,000

General factory department cost allocated to Pesticide department = 314,000 x 4,200/9,000

= $146,533

General factory department cost allocated to Liquid fertilizer department = 314,000 x 4,800/9,000

= $167,467

iii) Purchasing department cost = $169,000

Purchasing department cost allocated to Pesticide department = 169,000 x 120/180

= $112,667

Purchasing department cost allocated to Liquid fertilizer department = 169,000 x 60/180

= $56,333

	Pesticide	Liquid Fertilizer
Direct costs	$78,500	$107,400
Power	67,500	22,500
General Factory	146,533	167,467
Purchasing	112,667	56,333
Total	$405,200	$353,700

2.

	Departmental overhead rates
Pesticide	405,200/24,000 = $16.9 per machine hour
Liquid Fertilizer	353,700/8,000 = $44.2 per machine hour

Exact answers may slightly differ due to rounding off.