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

The support departments are ranked in the following order:

Rank 1- GF

Rank 2 - HR

Rank 3 - Maintenance

Allocation ratios are calculated as follows:

For GF:

Total Costs= 260,000

Square footage= 500+2,500+12,000+18,000= 33,000

Allocation Rate = 260,000/33,000 = 7.87879

Note: For calculating the allocation rate, we do not consider the respective support department's cost driver.

For HR:

Total Costs= 120,000+19,697 = 139,697

Direct Labour hours other than those of HR and GF = 44,000

Allocation rate for HR= 139,697/44,000 = 3.17493

For Maintenance

Total Costs= 80,000 + 3,939 + 12,700 = 96,639

Machine hours other than those of Maintenance= 12,000 + 3,000 = 15,000

Allocation rate for Maintenance = 96,639/15,000 = 6.44261

The Costs have been allocated to the departments as below using the allocation rates calculated:

Particulars	Maintenance	HR	GF	Fabricating	Assembly	Total
Direct Overhead Cost	80,000	120,000	260,000	93,400	56,700	610,100
Machine Hours	1,000	3,000	5,000	12,000	3,000
Direct Labour Hours	4,000	5,000	8,000	10,000	30,000
Square footage	500	2,500	10,000	12,000	18,000
Allocation rate for GF			7.87879
GF Allocation	3,939	19,697	-260,000	94,545	141,818
Sub Total	83,939	139,697	0	187,945	198,518
Allocation rate for HR		3.17493
HR Allocation	12,700	-139,697		31,749	95,248
Sub total	96,639	0	0	219,695	293,766
Allocation rate for Maintenance	6.44261
Maintenance Allocation	-96,639			77,311	19,328
Total	0	0	0	297,006	313,094	610,100

Overhead rates for Fabricating and Assembly:

1. Fabricating = 297,006/ 12,000(Machine Hours) = 25 per machine hour

2. Assembly = 313,094/30,000(Direct Labour hours) = 10 per direct labour hour