Question

Celestial Artistry Company is developing departmental overhead rates based on direct-labor hours for its two production departments, Etching and Finishing. The Etching Department employs 20 people and the Finishing Department employs 80 people. Each person in these two departments works 2,000 hours per year. The production-related overhead costs for the Etching Department are budgeted at $200,000, and the Finishing Department costs are budgeted at $320,000. Two service departments, Maintenance and Computing, directly support the two production departments. These service departments have budgeted costs of $48,000 and $250,000, respectively. The production departments’ overhead rates cannot be determined until the service departments’ costs are allocated. The following schedule reflects the use of the Maintenance Department’s and Computing Department’s output by the various departments.

Service Department (Using Department)  Maintenance Computing Etching Finishing

Maintenance (maintenance hours) ................................................... 0 1,000 1,000 8,000

Computing (minutes) ......................................................................... 240,000 0 840,000 120,000

Required:

1. Use the direct method to allocate service department costs. Calculate the overhead rates per directlabor hour for the Etching Department and the Finishing Department.

2. Use the step-down method to allocate service department costs. Allocate the Computing Department’s costs first. Calculate the overhead rates per direct-labor hour for the Etching Department and the Finishing Department.

Answer 1

Solution 1:

Service Department Cost Allocation - Direct Method and computation of overhead rate
From	Service Department		Production Departments
	Maintenance	Computing	Etching	Finishing
Direct charges of department	$48,000	$250,000	$200,000	$320,000
Maintenance (1:8)	-$48,000		$5,333	$42,667
Computing (84:12)		-$250,000	$218,750	$31,250
Total	$0	$0	$424,083	$393,917
Direct labor hour			40000	160000
Departmental overhead rate per labor hour			$10.60	$2.46

Solution 2:

Service Department Cost Allocation - Step Method (Allocation of Computing first) and computation of overhead rate
From	Service Department		Production Departments
	Maintenance	Computing	Etching	Finishing
Direct charges of department	$48,000	$250,000	$200,000	$320,000
Computing (24:84:12)	$50,000	-$250,000	$175,000	$25,000
Maintenance (1:8)	-$98,000		$10,889	$87,111
Total	$0	$0	$385,889	$432,111
Direct labor hour			40000	160000
Departmental overhead rate per labor hour			$9.65	$2.70