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	$312,000	$165,000	$78,500	$107,700
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

Answer:

1. Basis of allocation :

• For power department - machine hours [ total machine hours of Pesticide and Liquid fertilizer departments is 32,000 ( 24,000 + 8,000 ) ]
• For general factory department - square feet [ total square feet of Pesticide and Liquid fertilizer departments is 9,000 ( 4,200 + 4,800 ) ]
• For purchasing department - purchase orders [ total purchase orders of Pesticide and Liquid fertilizer departmnets is 180 ( 120 + 60 ) ]

Cost assignment:

	Pesticide	Liquid Fertilizers
Direct costs	$78,500	$107,700
Power	$67,500 [ $90,000 * ( 24,000 / 32,000 ) ]	$22,500 [ $90,000 * ( 8,000 / 32,000 ) ]
General Factory	$145,600 [ $312,000 * ( 4,200 / 9,000 ) ]	$166,400 [ $312,000 * ( 4,800 / 9,000 ) ]
Purchasing	$110,000 [ $165,000 * ( 120 / 180 ) ]	$55,000 [ $165,000 * ( 60 / 180 ) ]
Total	$401,600	$351,600

2.

	Departmental overhead rates [ Total overhead of the department / total machine hour of that department ]
Pesticide	$16.73 per machine hour [ $401,600 / 24,000 ]
Liquid Fertilizer	$43.95 per machine hour [ $351,600 / 8,000 ]