Question

Question 1) WA cement Limited manufactures cement mix for large construction companies. It has thee overhead costs to allocate. These are rent ($300,000), electricity ($200,000) and insurance (100,000) costs. These costs need to be allocated to four departments- quality control, maintenance, fabrications and mixing. The first two department has service departments. Rent costs are to be allocated on the basis of floor space occupied, while electricity costs are allocated the basis of machine hours. Finally, insurance costs are allocated on the basis of machine hours.

The quality control department allocated overheads on the other departments based on the number of inspection. The maintenance department allocates overheads to other departments based on machine hours. The fabrications department cost driver for product cost allocation is direct labour hours, and management expects fabrications to be 7000 direct labour hours. The mixing department’s driver for product cost allocations is machine hours.

Cost type	Quality Control	Maintenance	Fabrications	Mixing
Number of inspections	6	8	5	-
Floor Space (sq. m)	900	550	900	3000
Machine Hours	300	400	1000	1300

1. Use the direct method to allocate overheads from the service departments to production departments.
2. What is the overhead cost rate in the production departments respectively?
3. How much overhead is allocated to a product, if it used direct labour hours in fabrications and two direct labour hours in mixing, and if its uses 3 machine hours in fabrications and two machine hours in mixing?

Answer 1

Answer given below

in case of question c. it assumed one labor hour is used in fabrication department