Question

X Company’s chief accountant has accumulated the following annual estimated production and service department cost.

Service Departments                                         

Employee Relation.      $35000

Storeroom                        42000

Maintenance                    48000

Production Departments

Mixing                                47350

Baking                                57650

To allocate service department costs to production departments the relevant cost drivers are:

Employee Relations – Number of Employees

Storeroom – Material requisitions

Maintenance – Maintenance hours

Budgeted values:

Department.              No. of emp.      Material requisition.     maintenance hours      machine hours

Employee Relation     1000                        400                  400

Storeroom                    500                       700                  1800

Maintenance                  2500                    1000                700

Mixing                         4000                    3000                8000                           4000

Baking                         3000                    1000                2000                        5000

Required:

a. Use the direct method and allocate service department costs.

b. Assume production department costs are allocated to products based on machine hours, calculate the overhead rate for the production departments.

Answer 1

	Ans 1. Direct Allocation of Service department costs
	X Company	Service Departments	Production Departments
	Departments	Employee Relations	Store room	Maintenance	Mixing	Baking	Total
a	Total Departmental costs	35,000	42,000	48,000	47,350	57,650	230,000
	No of Employees for Allocating Employee Realtions dept cost				4,000	3,000	7,000
b	Employee Realtions cost allocated to Prodn Dept Employees @$5/employee ($35000/7000)=	(35,000)			20,000	15,000
	No of Material Requisitions for Storeroom cost allocation				3,000	1,000	4,000
c	Storeroom cost allocated to Prodn. depts @$10.5 per Material reqn ($42,000/4000)		(42,000)		31,500	10,500
	No of Maintenance Hrs to allocate Maintenance dept costs				8,000	2,000	10,000
d	Maintenance Dept costs allocated to Prodn dept @$4.8/Maintenance Hrs($48,000/10000)=			(48,000)	38,400	9,600
e	Total Costs pf Production depratments with allocated service dept costs=a+b+c+d	-	-	-	137,250	92,750	230,000	Ans a.
f	Machine Hrs for allocation of Production dept costs				4,000	5,000
g	Production dept cost per Machine Hr=e/f=				$             34.31	$              18.55		Ans b.