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	$420,000	$150,000	$44,000	$76,000
Square footage	—	2,200	4,400	4,400
Number of receiving orders	320	—	1,600	1,250
Direct labor hours	—	—	28,000	48,000

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
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

Allocation Ratio
	Assembly	Finishing
Square Footage	0.5000	0.5000
	(4400/8800)	(4400/8800)
No. of Receiving Order	0.5614	0.4386
	(1600/2850)	(1600/2850)

Allocation by Direct Cost Method
	Assembly	Finishing
General Factory	$210,000	$210,000
	(420000*0.50)	(420000*0.50)
Receiving	$84,210	$65,790
	(150000*0.5614)	(150000*0.4386)
Direct Cost	$44,000	$76,000
Total	$338,210	$351,790

Computation of Department Overhead Rates

Assembly= Total Overhead/ Direct Labour Hour

=$338210/28000= $12.08

Finishing= Total Overhead/ Direct Labour Hour

=$351790/48000= $7.33