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    $68,000     $46,000    $77,000 
Square feet occupied          2,000       3,500      3,000
Number of employees              36          24         30  
Maintenance hours             2,500       2,000      4,000

Information for the two production departments is
given below:

                              Assembly          Packaging
Directly traced overhead      $167,060           $120,090  
Square feet occupied             2,100              1,400
Number of employees                 42                 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 amount of overhead allocated from the personnel
department to the packaging department.

Answer 1

Solution

Av Y6 Company

Sequential method of cost allocation:

Calculation of the amount of overhead allocated from the personnel department to the packaging department:

Notes and Computations:

Under step method, the direct costs of service departments are allocated based on given proportion of usage by each department assuming a sequential order.

The sequence normally begins with the service department (Personnel) that reports highest costs.

Subsequently, the next department with highest costs allocates its total direct costs (including costs allocated from the first service department).

Under this method no costs are allocated back to the department that has already allocated its entire costs.

For the given problem, since no specific allocation order has been mentioned, allocation starts with Personnel department, which has highest cost of $77,000.

Hence, the amount of overhead allocated from the personnel department to the packaging department is = $11,550

Computations –

Direct costs of Personnel to other departments on the following basis –

Total costs = $77,000

Admin = 77,000 x (36/120) = 23,100

Maint = 77,000 x (24/120) = 15,400

Assembly = 77,000 x (42/120) = $26,950

Packaging = 77,000 x (18/120) = 11,550

Notes:

The allocation is based on the proportion of number of employees in each department to the total number of employees. The number of employees in Personnel department are not considered for allocation.

The total number of employees = (admin) 36 + (maint) 24 + (assembly) 42 + (packaging) 18 = 120