Question

Revised Prob 17-26
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.

Answer 1

Direct Method
	Service Dept		Production Dept
	Maintenance	Computing	Finishing	Etching
Costs	$36,000	$310,000	$330,000	$280,000
Labour Hours Used	3000	2000	9000	3000
Per hour labor rate (36000/12000)	3
Maintenance	-36000		27000	9000
Computing Dept
Computing (Minutes)	180000		130000	620000
Per Minutes Rate ( 310000/930000)		0.41
Allocation	0	-310000	53733	256267
Maintenance - II (60000/750000 mnts)	0		0	0
Total cost	$0	$0	$410,733	$545,267
Number of employees			120	60
Overhead rate per Labor			3,423	9,088

The direct method allocates costs of each of the service departments to each operating department based on each department’s share of the allocation base. Services used by other service departments are ignored. This means the direct method does not recognize service performed by other service departments.

Step down Method
	Service Dept		Production Dept
	Maintenance	Computing	Finishing	Etching
Costs	$36,000	$310,000	$330,000	$280,000
Computing Dept
Computing (Minutes)	180000		130000	620000
Per Minutes Rate ( 310000/930000)		0.33
Allocation	60000	-310000	43333	206667
Total cost in Step I	96000	0	373333	486667
Maintenance Dept
Labour Hours Used	3000	2000	9000	3000
Per hour labor rate (36000/12000)	8.00
Maintenance	-96000	0	72000	24000
Total cost	$0	$0	$445,333	$510,667
Number of employees			120	60
Overhead rate per Labor			3,711	8,511