Question

Bake-Ri is a company that makes high quality whole grain bread and sell the bread to the malls in JABODETABEK. In making bread, there are two departments directly involved namely Mixing and decorating, while those that help to maintain inventory and also the availability of raw materials are purchasing and storage. Of course in the making of bread many costs that arise such as direct material, direct labor, and factory overhead. Factory Overhead will be in all departments of Bake-Ri. The total factory overhead costs that arise are as much as $ 135,000, with details of $ 50,000 for mixing, $ 45,000 for decorating, $ 25,000 for Purchasing, and $ 15,000 for storage. For the most weight that appears in the process of making bread is for the purchasing department to provide support for the mixing as much as 50%, for decorating as much as 20%, and to storage as much as 30%. Storage provides support for mixing as much as 30%, for decorating as much as 50%, while the rest is for other supporting departments. Before conducting its business, the purchasing department provides support to storage department in order to maintain the availability of the raw material for making bread. You are asked to choose the method of calculating the factory overhead allocation within the company and give reasons why you should use that method compared to other methods.

Answer 1

Answer :

Company Should Choose STEP ALLOCATION for Calculating the factory overhead allocation within Company.

Concept :

Set Allocation Method - Costs from Service department may be allocated to the other Service department as well as the producing department.

Service Departments are Prioritized , beginning with the one that performs services for the most other service departments and continuing towards the one that performs the least.

Reason :

After Referring the above concept the following can be reason for Choosing Step Allocation Method over other method.

1. Service Departments are using each other services. So, Cost of Service department are to be allocated to Production as well Service department. unlike Direct Method in which Costs of Service department are directly allocated to Production Department and not Other Service department.

2. In above case Purchasing Department needs to be Prioritized as it is supporting storage department prior to conducting business unlike Reciprocal Method in which Service departments are not Prioritized and Cost are allocated using Reciprocal equation without giving priority to any Service department.

Thus, Due to above reasons Step Allocation Method is more suitable as compared to other method of factory overhead allocation.