Question

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. 2 Use the step-down method to allocate service department costs. Allocate the Computing department's costs first. Calculate the overhead rates per direct-labor hour for the Finishing Department and the Etching Department.

							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.
	2	Use the step-down method to allocate service department costs. Allocate the Computing department's
		costs first. Calculate the overhead rates per direct-labor hour for the Finishing Department
		and the Etching Department.

Answer 1

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Working-1
	Finishing	Etching
People	120	60
Hours	1500	1500
Total Hours	180000	90000
Part 1			Maintenance	Computing
	Budgeted Overheads		$           36,000	$         310,000
	Total Hours used by Finishing and Etching		12000	750000
	Per hour Rate		$                3.00	$                0.41
Allocation to:
	Finishing
	9000*3		$           27,000
	130000*0.4133		$           53,733
	Etching
	3000*3		$             9,000
	620000*0.4133		$         256,267
Overhead Rates:
			Finishing	Etching
	Department Overhead own		$         330,000	$         280,000
	Allocation:
	Maintenace		$           27,000	$              9,000
	Computing		$           53,733	$         256,267
	Total Overheads		$         410,733	$         545,267
	Direct Labor Hours (working-1)		180000	90000
	Overhead rate per direct labor hour		$                2.28	$                6.06
Part 2
			Maintenance	Computing	Finishing	Etching	Totak
	Maintenance (machine hours)			2000	9000	3000	14000
	Computing (minutes)		180000		130000	620000	930000
	Total Overhead for Service Department		$           36,000	$         310,000
	Computing Department Allocation		$           60,000	$       -310,000	$       43,333	$       206,667	$             -
	(310000/930000*Hours used by other department)
	Maintenane Department Allocation		$         -96,000		$       72,000	$         24,000	$             -
	(36000+60000)/12000*Hours used by oth dept)-excludign Computing
	Total Overheads		$                    -	$                     -	$     115,333	$       230,667
Overhead Rates:
			Finishing	Etching
	Department Overhead own		$         330,000	$         280,000
	Allocation:
	Maintenace		$           72,000	$           24,000
	Computing		$           43,333	$         206,667
	Total Overheads		$         445,333	$         510,667
	Direct Labor Hours (working-1)		180000	90000
	Overhead rate per direct labor hour		$                2.47	$                5.67