Question

SuperDry Manufactures and sells T-shirts for all kinds of events. The company has two manufacturing operations- shirt-making and printing. When the company receives an order, the shirt-making department obtains the materials requested and has the fabric cut and sewn to sizes. The ready T-shirts are then sent to the printing department where the customer labels or design are prepared and printed onto the surface with hot press machines.

SuperDry has three support departments- Building Maintenance, Human Resources and Design & patterns. For the 1^st quarter of 201X, the direct/direct overhead costs incurred by each department are as follows (direct costs for S1- S3; direct overhead costs for P1, P2, and R):

Shirt-making (P1)                             $260,000              Building maintenance (S1)           $65,000

Printing (P2)                                       $170,000              Human Resources (S2)                  $40.000

Sales (R)                                               $84,000 Design & Patterns (S3)                   $38,000

The cost drivers identified for costs incurred by S1, S2 and S3 are numbers of square footage,

Number of employees and the number of designs respectively.

The following table summarises the usage of the costs driver by each department:

                                                                S1           S2           S3           P1           P2           R

Number of Design -              -              -              16           30           8

Number of Employees 4              2              6              20           12           12

Square feet                                        5,000 10000 10000 15000 25000 5000

Required:

i)SupeDry allocates support department costs using the step-down method. Recommend the order by which SuperDry should do so. Justify your recommendation.

ii)Compute the total amount of overhead costs for P1, P2 and R using the step-down method and based on the order recommended in part (1).

Answer 1

(I) Allocation order

Recommended order =

S2 - Overhead is allocated first - S1,S3, P1,P2 and R ( in the ratio of number of emloyees)

S1 - Overhead is allocated next - S3, P1,P2 and R ( in the ratio of Square feet)

Finally S3 - Overhead is allocated -  P1,P2 and R ( in the ratio of number of designs)

Justification for recommendation

In using the step method, allocation should be done the order of highest service provider first and followed by next highest to least service provider in the last.

In applying this rule we find a tie with S1 (building maintenance) and S2 ( human resources) because these two providing service to remaing all 5 departments. But Building maintenance is not possible with out human resources. Hence among the S1 and S2, we choose S2 as the highest service provider.

Required - ii

	S2	S1	S3	P1	P2	R
Assigned Overhead	40000	65000	38000	260000	170000	84000
S2 Overhead allocated ( 4:6:20:12:12)	-40000	2962.963	4444.44444	14814.81	8888.889	8888.889
S1 Overhead allocated (2:3:5:1)		-67962.963	12356.9091	18535.36	30892.27	6178.455
			-54801.354	16237.33	30445	8118.667
Total amount of overhead costs				309587.5	240226.2	107186