Question

Job FB69 at NW Fab, required 8 kg of direct materials at 16 € per kg and 5 direct labor hours at €15 per hour. Job FB69 represents 4 units completed.

Data concerning overhead (indirect costs) are the following:

Cost center	Normal cost	Allocat° base (AB)	Normal # of AB units	# of employees	sq meters
Purchasing	150,000	kg purchased	15,000	10	150
Manufacturing	400,000	Direct labour hour	20,000	25	800
Selling	120,000	Units solds	20,000	15	200
Human Resources	90,000	# of employees		5	150
Maintenance	80,000	space sq meters		6	80

Calculate the normal cost of job FB69 by using for support center allocation to mission centers:

* the direct method

* the step-down method

Note: HR is allocated using # of employees; Maintenance is allocated using space

Answer 1

Direct Method: In this method cost of service department is directly attributed to Operational departmenets and not to service department.

Human Resouces = 90000 .. Allocation is based on no. of employees.
Cost Allocation to Purchasing, Manufacturing and selling department.
Total No. of Employees of these above departments = 10+25+15 = 50
Cost Allocated to Purchasing Department = 90000/50*10 = 18000
Cost Allocated to Manufacturing Department = 90000 / 50 * 25 = 45000
Cost Allocated to Selling Department = 90000 /50 *15 = 27000

Cost Allocation of Maintenance Department : Basis space sq meters
Total space sq meters of Operating Departments = 150+800+200 = 1150
Cost Allocated to Purchasing Department = 80000 / 1150 *150 = 10435
Cost Allocated to Manufacturing Department = 80000 / 1150 *800 = 55652
Cost Allocated to Selling Department = 80000 / 1150 *200 = 13913

Total Cost of Purchasing Department = 150000 + 18000 + 10435 = 178435
Total Cost of Manufacturin Department = 400000 + 45000 + 55652 = 500652
Total Cost of Selling Department = 120000 + 27000 + 13913 = 160913

Cost of Job FB 69:
Direct Material (8*16) =       128
Direct Labour (5*15) =         75
Purchasing Cost =             9.52 (178435 / 150000*8)
Manufacturing cost =        125.16     (500652 / 20000 * 5)    
Selling Cost =                   32.18 (160913 / 20000*4)
Total Cost =                      369.86

Step Down Method:
First allocation is of Human Resource:
Allocation of Human Resource overhead = 90000
Total NO. of employees of other departments= 10+25+15+6 = 56
Cost Allocated to Purchasing Department = 90000/56*10 = 16071
Cost Allocated to Manufacturing Department = 90000 / 56 * 25 = 40179
Cost Allocated to Selling Department = 90000 /56 *15 = 24107
Cost Allocated to Maintenance Department = 90000 / 56* 6 = 9643

Total Cost of Maintenance Department = 80000 + 9643 = 89643, this is allocated on other operating departments:
Total space sq meters of Operating Departments = 150+800+200 = 1150
Cost Allocated to Purchasing Department = 89643/ 1150 *150 = 11693
Cost Allocated to Manufacturing Department = 89643 / 1150 *800 = 62360
Cost Allocated to Selling Department = 89643 / 1150 *200 = 15590

Total Cost of Purchasing Department = 150000 + 16071 + 11693 = 177764
Total Cost of Manufacturin Department = 400000 + 40179 + 62360 = 502539
Total Cost of Selling Department = 120000 + 24107 + 15590 = 159697

Cost of Job FB 69:
Direct Material (8*16) =       128
Direct Labour (5*15) =         75
Purchasing Cost =             9.48 (177764 / 150000*8)
Manufacturing cost =        125.63     ( 502539 / 20000 * 5)    
Selling Cost =                   31.93    (159657 / 20000*4)
Total Cost =                      370.04