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Revised Prob 17-26 Celestial Artistry Company is developing departmental overhead rates based on direct-labor hours for...

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.

Solutions

Expert Solution

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

ekkarill92 answered 2 years ago
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