Question

Revised Prob 17-26
	Celestial Artistry Company is developing departmental overhead rates based on direct-labor hours
	for its two production departments, Finishing and Etching. The Finishing Department employs
	120 people and the Etching Department employs 60 people. Each person in these two departments
	works 1,500 hours per year. The production-related overhead costs for the Finishing Department are
	budgeted at $330,000, and the Etching Department costs are budgeted at $280,000. Two service
	departments, Maintenance and Computing, directly support the two production departments. These
	service departments have budgeted costs of $36,000 and $310,000, respectively. The production
	departments' overhead rates cannot be determined until the service departments' costs are allocated.
	The following schedule reflects the use of the Maintenance Department's and Computing Department's
	output by the various departments.
							Using Department
	Service Department						Maintenance	Computing	Finishing	Etching
	Maintenance (maintenance hours)						0	2,000	9,000	3,000
	Computing (minutes)						180,000	0	130,000	620,000
	Required:
	1	Use the direct method to allocate service department costs. Calculate the overhead rates per direct-labor
		hour for the Finishing Department and the Etching Department.
	2	Use the step-down method to allocate service department costs. Allocate the Computing department's
		costs first. Calculate the overhead rates per direct-labor hour for the Finishing Department
		and the Etching Department.

Answer 1

	Finishing	Etching
Number of people	120	60
Multiply: hours per year	1,500	1,500
Direct-labor hours	180,000	90,000

Part 1

Direct method
Department	Computing	Maintenance	Finishing	Etching
Direct overhead	310,000	36,000	330,000	280,000
Allocated Computing In Proportion of 130000 : 620000 respectively (130000+620000=750000) (For Finishing = 310000*130000/750000) (For Etching = 310000*620000/750000)	(310,000)		53,733	256,267
Allocated Maintenance In Proportion of 9000 : 3000 respectively (9000+3000=12000) (For Finishing = 36000*9000/12000) (For Etching = 36000*3000/12000)		(36,000)	27,000	9,000
Total cost after departmental allocation using direct method	-	-	$          410,733	$          545,267
Divided by: Direct-labor hours			180,000	90,000
Overhead rates per direct-labor hour			$            2.2819	$            6.0585

Part 2

Step-down method
Computing department goes first
Department	Computing	Maintenance	Finishing	Etching
Direct overhead	310,000	36,000	330,000	280,000
Allocated Computing In Proportion of 180000 : 130000 : 620000 respectively (180000+130000+620000=930000) (For Maintenance = 310000*180000/930000) (For Finishing = 310000*130000/930000) (For Etching = 310000*620000/930000)	(310,000)	60,000	43,333	206,667
Total	-	96,000	373,333	486,667
Allocated Maintenance In Proportion of 9000 : 3000 respectively (9000+3000=12000) (For Finishing = 96000*9000/12000) (For Etching = 96000*3000/12000)		(96,000)	72,000	24,000
Total cost after departmental allocation using step-down method	-	-	$          445,333	$          510,667
Divided by: Direct-labor hours			180,000	90,000
Overhead rates per direct-labor hour			$            2.4741	$            5.6741