Question

Direct Method

Eilers Company has two producing departments and two support departments. The following budgeted data pertain to these four departments:

	Support Departments		Producing Departments
	General Factory	Receiving	Assembly	Finishing
Direct overhead	$470,000	$150,000	$48,000	$76,000
Square footage	—	2,200	4,400	4,400
Number of receiving orders	360	—	2,000	1,150
Direct labor hours	—	—	27,000	49,000

The company has decided to simplify its method of allocating support service costs by switching to the direct method.

Required:

1. Allocate the costs of the support departments to the producing departments using the direct method. Round allocation ratios to four significant digits. Round allocated costs to the nearest dollar. Use the rounded values for subsequent calculations.

Allocation ratios:

	Assembly	Finishing
Square footage	0.5	0.5
Number of receiving orders
Allocations:
	Assembly	Finishing
General Factory	$	$
Receiving
Direct costs
Total	$	$

2. Using direct labor hours, compute departmental overhead rates. (Round to the nearest cent.)

	Overhead Rate
Assembly	per direct labor hour
Finishing	per direct labor hour

Answer 1

Requirement 1:

In direct method of allocation, we directly allocate the cost of Support Departments to Producing Department using the proper basis of allocation.

Here,

The cost of General Factory department will be allocated to the producing department on the basis of 'square footage' as general department provide the general services to the producing department and the best basis of allocation of this cost is square footage.

And the cost of Receiving department will be allocated on the basis of 'number of receiving orders' as the function of receiving department is related to receiving orders and ‘number of receiving orders’ is the best basis of allocation.

Allocation ratios:

Square footage:

Total square footage of producing department = Area occupied by Assembly + Area occupied by Finishing = 4,400 square footage +4,400 square footage = 8,800 square footage

Ratio of assembly department = Area occupied by assembly department / Total square footage of producing department

= 4,400 square footage / 8,800 square footage = 0.5

Ratio of finishing department = Area occupied by finishing department / Total square footage of producing department

= 4,400 square footage / 8,800 square footage = 0.5

Number of Receiving Orders:

Total number of receiving orders of producing department = Number of receiving orders by Assembly + number of receiving orders by Finishing = 2,000 orders +1,150 orders = 3,150 orders

Ratio of assembly department = Number of receiving orders by assembly department / Total number of receiving orders of producing department

= 2,000 orders / 3,150 orders = 0.6349

Ratio of finishing department = Number of receiving orders by finishing department / Total number of receiving orders of producing department

= 1,150 orders / 3,150 orders = 0.3651

Allocation ratios:

	Assembly	Finishing
Square footage	0.5	0.5
Number of receiving orders	0.6349	0.3651

Allocation of Cost of Support Departments:

Allocations:
	Assembly	Finishing
General Factory	$ 235,000	$ 235,000
Receiving	$ 95,235	$ 54,765
Direct costs	$ 48,000	$ 76,000
Total	$ 378,235	$ 365,765

Cost allocated to producing department = Cost of support department × Ratio of allocation

General Factory:

To Assembly Department = $470,000 × 0.5 = $235,000

To Finishing Department = $470,000 × 0.5 = $235,000

Receiving:

To Assembly Department = $150,000 × 0.6349 = $95,235

To Finishing Department = $470,000 × 0.3651 = $54,765

Requirement 2:

Overhead rate = Total cost / Direct labor hours

Assembly = $378,235 / 27,000 hours = $14.01 per direct labor hour

Finishing = $365,765 / 49,000 hours = $7.46 per direct labor hour

	Overhead Rate
Assembly	$14.01 per direct labor hour
Finishing	$7.46 per direct labor hour