Question

ABC Company operates two service departments, quality control and
maintenance, and two production departments, cutting and finishing.
Service department costs are allocated to production departments
using a sequential two-stage allocation method. Quality control
department costs are allocated on the basis of number of inspections
and maintenance department costs are allocated on the basis of
machine hours. In the second stage, departmental overhead rates for
the two production departments are calculated using direct labor
hours as the activity for each department. Information for the four
departments is given below:

                             Q.C.   Maintenance    Cutting   Finishing
Directly trace overhead   $142,000   $240,000     $316,800   $339,600  
Number of inspections        5,000      5,000       14,000      6,000
Machine hours               50,000     20,000       22,000     28,000
Direct labor hours            N/A        N/A        20,000     10,000

The company has just completed job #603, which required 20 direct labor
hours in the cutting department and 50 direct labor hours in the finishing
department. The direct material and direct labor cost for job #603 totaled
$1,840. Job #603 consisted of a total of 100 units. 70 of those units were
sold to a customer. ABC Company sets the selling prices of its products at
150% of manufacturing cost.

Calculate the amount of gross profit ABC Company earned on the sale of the
70 units from job #603.

Answer 1

Solution:

From	Service Department Cost Allocation - Sequential alloction (Allocation of quality control first)
	Service Department		Production Departments
	QC	Maintenance	Cutting	Finishing
Direct charges of department	$142,000.00	$240,000.00	$316,800.00	$339,600.00
Quality Control (5:14:6)	-$142,000.00	$28,400.00	$79,520.00	$34,080.00
Maintenance (22:28)		-$268,400.00	$118,096.00	$150,304.00
Total	$0.00	$0.00	$514,416.00	$523,984.00

Computation of departmental overhead rate
Particulars	Cutting	Finishing
Allocated overhead	$514,416.00	$523,984.00
Estimated direct labor hours	20000	10000
Overhead rate per direct labor hour	$25.72	$52.40

Computation of expected cost and cost per unit of Job 603
Particulars	Amount
Direct material and labor	$1,840.00
Overhead - Cutting (20*$25.72)	$514.40
Overhead - Finishing (50*$52.40)	$2,620.00
Total job cost	$4,974.40
Nos of units	100
Cost per unit	$49.74

Selling price per unit -Job 603
Particulars	Amount
Cost per unit	$49.74
Markup (50%)	$24.87
Selling price	$74.62

Gross Profit - Job 603
Particulars	Amount
Sales (70*$74.62)	$5,223.40
Cost (70*$49.74)	$3,481.80
Gross Profit	$1,741.60