Question

Av-Y6 Company operates three service departments,
administration, maintenance, and personnel and
two production departments, assembly and packaging.

Information for the three service departments is
given below:

                              Admin      Maint      Person
Directly traced overhead    $65,000     $33,000    $74,000 
Square feet occupied          2,000       3,500      3,000
Number of employees              42          24         30  
Maintenance hours             2,500       2,000      4,000

Information for the two production departments is
given below:

                              Assembly          Packaging
Directly traced overhead      $167,030           $114,090  
Square feet occupied             2,100              1,400
Number of employees                 36                 18 
Maintenance hours                6,400              1,600
Direct labor hours              20,000             18,000
Machine hours                   10,000             15,000

Av-Y6 Company uses the sequential method of allocation.
Information on the allocation bases and activities for
each department are given below.

Administration department costs are allocated on the basis
of square feet occupied, maintenance department costs are
allocated on the basis of maintenance hours, and personnel
department costs are allocated on the basis of number of
employees. In the second stage, assembly department overhead
costs are assigned to products based on machine hours.

Calculate the pre-determined overhead rate based on machine
hours used in the assembly department.

Answer 1

we shall first allocate cost to product department in sequence given

	Admin	Main	Person	Assembly	packaging	Total allocation base
Direct cost	$65,000	$33,000	$74,000	$167,030
Administration cost		22,750[3500/10,000]*65000	$19,500[3000/10000]*65000	$13,650[$65,000*2,100]/10,000		square feet 10,000[3500+3000+2100+1400]
Total Maintenace cost to be allocated		$55,750[$33,000+22,750]
Main cost			$18,583[$55,750/12,000]*4000	$29,733[$55,750/12,000]*6,400		Maintenance hours 12000[4000+6,400+1,600]
Total Personnel cost to be allocated			$112,083[$18,583+$19,500+$74,000]
Personnel cost				$74,722[$112,083/54]*36	$37,361[18/54]*112,083	54 Number of employees [36+18]
Total cost				$285,135[74722+29733+13650+167030]

Predetermined OH Rte(Assembly)=Total cost/Machine hour
=$285,135/10,000
=$28.51 per MH

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