Question

The Sendai Co., Ltd., of Japan has budgeted costs in its various departments as follows for the coming year:

Factory Administration	$	766,800
Custodial Services		275,640
Personnel		38,300
Maintenance		55,860
Machining—overhead		922,200
Assembly—overhead		777,800
Total cost	$	2,836,600

The company allocates service department costs to other departments in the order listed below.

Department	Number of Employees	Total Labor- Hours	Square Feet of Space Occupied	Direct Labor- Hours	Machine- Hours
Factory Administration	28	—	14,200	—	—
Custodial Services	12	8,000	2,300	—	—
Personnel	18	19,400	11,100	—	—
Maintenance	51	52,100	19,500	—	—
Machining	40	60,000	140,000	101,000	140,000
Assembly	160	180,000	40,000	234,000	40,000
	309	319,500	227,100	335,000	180,000

Machining and Assembly are operating departments; the other departments are service departments. Factory Administration is allocated based on labor-hours; Custodial Services based on square feet occupied; Personnel based on number of employees; and Maintenance based on machine-hours.

Required:

1. Allocate service department costs to consuming departments by the step-down method. Then compute predetermined overhead rates in the operating departments using machine-hours as the allocation base in Machining and direct labor-hours as the allocation base in Assembly.

2. Repeat (1) above, this time using the direct method. Again compute predetermined overhead rates in Machining and Assembly.

3. Assume that the company doesn’t bother with allocating service department costs but simply computes a single plantwide overhead rate that divides the total overhead costs (both service department and operating department costs) by the total direct labor-hours. Compute the plantwide overhead rate.

4. Suppose a job requires machine and labor time as follows:

	Machine- Hours		Direct Labor-Hours
Machining Department	210		33
Assembly Department	13		80
Total hours	223		113

Using the overhead rates computed in (1), (2), and (3) above, compute the amount of overhead cost that would be assigned to the job if the overhead rates were developed using the step-down method, the direct method, and the plantwide method.

Answer 1

1.

		In the Step down method, Service department costs are allocated in Production department and other Service Departments in a sequential process. The sequence adopted by the company is Factory Administration department, Custodial Services department, Personnel depatment and then Maintenance Department.
		Allocation with Step Down Method
			Service Departments	Operating departments	Total
			Factory Administration	Custodial Services	Personnel	Maintenance	Machining	Assembly
		Budgted Departmental Cost	766800	275640	38300	55860	922200	777800	2836600
		Allocation of Factory Administration Department Cost	-766800	19200	46560	125040	144000	432000		Working Note 1
			0	294840	84860	180900	1066200	1209800
		Allocation of Custodial Services Department Cost		-294840	15540	27300	196000	56000		Working Note 2
				0	100400	208200	1262200	1265800
		Allocation of Personnel Department Cost			-100400	20400	16000	64000		Working Note 3
					0	228600	1278200	1329800
		Allocation of Maintenance Department Cost				-228600	177800	50800		Working Note 4
		Total Overhead Cost				0	1456000	1380600

Predermined Overhead Rates

Machining Department = Overhead Cost/ No. of Machine Hours = 1456000/140000 = $ 10.40 Per Machine Hour

Assembly Department = Overhead Cost/ No. of Direct Labour Hours = 1380600/234000= $ 5.90 Per Direct Labour Hour

Working Note 1
Allocation of Factory Administration Department Cost
Allocation Basis : Labor Hours
		Custodial Services	Personnel	Maintenance	Machining	Assembly	Total
Factory Administration Department Cost							$        766,800
No. Of Labour Hours		8000	19400	52100	60000	180000	319500
Per Labour Hour Cost (766800/319500)							2.40
Allocation of Cost (No. of Labour Hours * Per Labour Hour Cost)		19200	46560	125040	144000	432000	766800.00
Working Note 2
Allocation of Custodial Services department’s cost:
Allocation Basis : Square Feet of Space required
			Personnel	Maintenance	Machining	Assembly	Total
Custodial Service Department Cost							$        294,840
Square Feet of Space Occupied			11100	19500	140000	40000	210600
Per Square Feet Cost (294840/210600)							1.40
Allocation of Cost (Space Occupied* Per Square Feet Cost)			15540	27300	196000	56000	294840.00
Working Note 3
Allocation of Personnel Services department’s cost:
Allocation Basis : number of employees
				Maintenance	Machining	Assembly	Total
Custodial Service Department Cost							$        100,400
number of employees				51	40	160	251
Per employee Cost (100400/251)							400.00
Allocation of Cost (number of employees* Per employee Cost)				20400	16000	64000	100400.00
Working Note 4
Allocation of Maintenance department’s cost:
Allocation Basis : Machine Hours
					Machining	Assembly	Total
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