Question

Support Department Cost Allocation Using the Step or Sequential Method

The step or sequential method requires that support departments be ranked and that the highest ranking support department be allocated first to all lower ranking support departments and the producing departments. Then the highest ranking support department is closed and the second-highest ranking support department is allocated to lower ranking support departments and the producing departments. This continues until all support department cost has been allocated to the producing departments. The sequential method takes partial  account of support department reciprocity. Reciprocity occurs when one support department uses the services of another support department. For example, Maintenance uses HR and HR may use the services of Maintenance. The sequential method does not take full account of reciprocity because lower ranking support department costs are never  allocated to higher ranking support departments.

Let's use Porter Company, as an example. Porter has two producing departments (Fabricating and Assembly) and three support departments (Maintenance, Human Resources (HR) and General Factory (GF)). Porter provided the following information on the five departments:

		Maintenance			HR			GF			Fabricating			Assembly
Direct overhead cost		$80,000			$120,000			$260,000			$93,400			$56,700
Machine hours		1,000			3,000			5,000			12,000			3,000
Direct labor hours		4,000			5,000			8,000			10,000			30,000
Square footage		500			2,500			10,000			12,000			18,000

Porter uses the sequential method of support department cost allocation, and support departments are ranked in order of direct overhead cost (from high to low). Maintenance is allocated based on machine hours, HR on direct labor hours, and GF on the basis of square footage. The Fabricating overhead rate is based on machine hours and the Assembly overhead rate is based on direct labor hours.

Calculate the allocation ratios to five significant digits and fill them into the following table (If an amount box does not require an entry, leave it blank or enter "0".) :

Maintenance

HR

GF

Fabricating

Assembly

General Factory

Human Resources

Maintenance

Using the allocation ratios, fill in the following table to allocate support department costs to the producing departments. (Round all allocated amounts to the nearest dollar. Leave cells blank that do not require an entry.)

Maintenance

HR

GF

Fabricating

Assembly

Direct overhead cost

$80,000

$120,000

$260,000

$93,400

$56,700

Allocate:

Maintenance

Human Resources

General Factory

Total after allocation

Notice that after allocation, zero dollars remain in the support departments and all overhead cost has been allocated to the producing departments. As a check on your work, add all direct overhead costs from the first line - it equals $610,100. Then add the totals after allocation - again, it equals $610,100.

Finally, calculate the overhead rates (rounded to the nearest cent) for Fabricating and Assembly.

Fabricating overhead rate $_______ per machine hour

Assembly overhead rate $________ per direct labor hour

Answer 1

	Maintenance	HR	GF	Fabrication	Assembly	Total
Direct overhead cost	80000	120000	260000	93400	56700	610100
Machine hours	1000	3000	5000	12000	3000	24000
Direct labor hours	4000	5000	8000	10000	30000	57000
Square footage	500	2500	10000	12000	18000	43000

For calculating allocation ratios:

Costs of GF being highest among support costs will be allocated first followed by HR and lastly maintenance

	Maintenance	HR	GF	Fabrication	Assembly
GF allocation	0.015151515	0.075757576	0	0.363636364	0.545454545
	=500/33000	=2500/33000		=12000/33000	=18000/33000
HR allocation	0.090909091	0	0	0.227272727	0.681818182
	=4000/44000			=10000/44000	=30000/44000
Maintenance allocation	0	0	0	0.8	0.2
				=12000/15000	=3000/15000

	Maintenance	HR	GF	Fabrication	Assembly	Total
Direct overhead cost	80000	120000	260000	93400	56700	610100
Allocation of:
GF	3939	19697	-260000	94545	141818	0
	=260000*0.0152	=260000*0.0758		=260000*0.364	=260000*0.545
HR	12700	-139697	0	31749	95248	0
	=139697*0.091			=139697*0.227	=139697*0.682
Maintenance	-96639	0	0	77311.2	19327.8	0
				=96639*0.8	=96639*0.2
Total	0	0	0	297006	313094	610100
Machine hours				12000	3000
Direct labor hour				10000	30000
Fabricating rate'=overhead cost/machine hours				24.75
				=297006/12000
Assembly rate=overhead cost/labor hours					10.44
					=313094/30000

Note: Rounding off of ratios is not done while allocation of costs, there may arise a difference if ratios are rounded off