The Central Valley Company has prepared department overhead budgets before allocations totaling $176,180 for support and operating departments. Management wants to develop individual department overhead rates using either the step-down or direct allocation method. Under the step-down method, support department costs are allocated in the order listed using the most appropriate allocation base. Under the direct method, each support department's costs are directly allocated using the listed allocation bases. Overhead rates are then calculated for the Machining and Assembly departments based on direct manufacturing labor hours. Total overhead costs are then calculated for two jobs using the rates from each method.
The Central Valley Company has prepared department overhead budgets before allocations totaling $176,180 for support and operating departments. Management wants to develop individual department overhead rates using either the step-down or direct allocation method. Under the step-down method, support department costs are allocated in the order listed using the most appropriate allocation base. Under the direct method, each support department's costs are directly allocated using the listed allocation bases. Overhead rates are then calculated for the Machining and Assembly departments based on direct manufacturing labor hours. Total overhead costs are then calculated for two jobs using the rates from each method.
The Central Valley Company has prepared department overhead budgets before allocations totaling $176,180 for support and operating departments. Management wants to develop individual department overhead rates using either the step-down or direct allocation method. Under the step-down method, support department costs are allocated in the order listed using the most appropriate allocation base. Under the direct method, each support department's costs are directly allocated using the listed allocation bases. Overhead rates are then calculated for the Machining and Assembly departments based on direct manufacturing labor hours. Total overhead costs are then calculated for two jobs using the rates from each method.
The Central Valley Company has prepared department overhead budgets before allocations totaling $176,180 for support and operating departments. Management wants to develop individual department overhead rates using either the step-down or direct allocation method. Under the step-down method, support department costs are allocated in the order listed using the most appropriate allocation base. Under the direct method, each support department's costs are directly allocated using the listed allocation bases. Overhead rates are then calculated for the Machining and Assembly departments based on direct manufacturing labor hours. Total overhead costs are then calculated for two jobs using the rates from each method.
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Allocating costs of support department: step-down and direct methods.
The Central Valley Company has prepared department overhead budgets for budgeted-volume levels
before allocations as follows
Supporting departments: Building and grounds 45000 Personnel 300 General plant administration 37320 Cafeteria: operating loss 970 Storeroom 9990 93580 Operating departments: Machining 36600 Assembly 46000 82600 Total for support and operating departments 176180
Management has decided that the most appropriate inventory costs are achieved using individual department overhead rates. These rates are developed after support-department costs are allocated to operating departments. Bases for allocation are to be selected from the following:
Direct Manu Labor- Square Feet of Floor
Number of Employees DEPARTMENT hours Space Occupied Building and grounds 0 0 0 Personnel 0 0 2500 General plant administration 0 40 12000 Cafeteria: operating loss 0 10 5000 Storeroom 0 5 6000 Machining 8000 55 22000 Assembly 32000 140 202500 Total 40000 250 250000
1. Using the step-down method, allocate support-department costs. Develop overhead rates per direct manufacturing labor-hour for mach and assembly. Allocate the costs of the support departments in the order given in this problem. Use the allocation base for each support department you think is most appropriate. 2. Using the direct method, rework requirement 1. 3. Based on the following information about two jobs, determine the total overhead costs for each job by using rates developed in (a) requirement 1 and (b) requirement 2.
Direct Charges Allocation of building & grounds Allocation of personnel Allocation of general plant admin Allocation of cafeteria Allocation of storeroom Total cost of Machining&Assembly Direct Manu labor hours as denominator Overhead Rate
DIRECT METHOD
Particulars
Manufacturing Labor- Direct Charges
Number of Requisitions Hours Allocation of building & grounds 0 0 Allocation of personnel 0 0 Allocation of general plant admin 0 0 Allocation of cafeteria 3000 0 Allocation of storeroom 2000 0 Total cost of Machining&Assembly 13000 6000 Direct Manu labor hours as denominator 26000 4000 Overhead Rate 44000 10000
manufacturing labor-hour for machining
he allocation base for each support TOTAL OVERHEAD COSTS FOR EACH JOB
by using rates developed in
STEP-DOWN METHOD Overhead Rate Total Cost
Overhead Rate Total Cost
DIRECT METHOD Overhead Rate Total Cost
Overhead Rate Total Cost
ESSAY As the manager of the Machining Department, amount of costs from the supporing department showed lower allocation costs as compared to th culars Allocation Base Supporting General plant Building and grounds Personnel Cafeteria administration 45,000 300 37,320 970 Square feet of floor space - 45,000 450 2,160 900 Number of Employees - 750 120 30 Manufacturing labor- hours - 39,600 2,700 Number of Employees - 4,600 Requisition
as denominator
culars Allocation Base Supporting
General plant Building and grounds Personnel Cafeteria administration 45,000 300 37,320 970 Square feet of floor space - 45,000 Number of Employees - 300 Manufacturing labor- hours - 37,320 Number of Employees - 970 Requisition
ger of the Machining Department, I would choose the direct allocation method over the step-down method because it resulted in a lower osts from the supporing departments' allocation to the Machining Department. In both Jobs 88 and 89, the direct method consisten er allocation costs as compared to that of the step-down method's, which is more desirable. Operating Total
4,410 40,590 - 85 215 - 12,440 24,880 - 274 696 - - 9,990 5,994 3,996 - 59,802 116,378 176,180 8,000 32,000 7.48 3.64 esulted in a lower 89, the direct method consistently Support-department cost allocations; single-department cost pools; direct, step-down, and reciprocal methods. The Milton Company has two products. Product 1 is manufactured entirely in department X. Product 2 is manufactured entirely in department Y. To produce these two products, the Milton Company has two support departments: A (a materials-handling department) and B (a power-generating department). An analysis of the work done by departments A and B in a typical period follows:
Used by Supplied by A B X Y A 0 200 500 300 0.2 0.5 B 750 0 125 375
The work done in department A is measured by the direct labor-hours of materials-handling time. The work done in department B is measured by the kilowatt-hours of power. The budgeted costs of the support departments for the coming year are as follows: Department A Departmetn B (Materials handling) Power Generation Variable indirect labor and indirect materials 150000 cost 15000 Supervision 45000 25000 Depreciation 15000 50000 210000 90000 +power costs +materials-handling cost
The budgeted costs of the operating departments for the coming year are $1,250,000 for department X and $950,000 for department Y. Supervision costs are salary costs. Depreciation in 15-34 department B is the straight-line depreciation of power-generation equipment in its 19th year of an estimated 25-year useful life; it is old, but well-maintained, equipment.
Required: 1. What are the allocations of costs of support departments A and B to operating departments X and Y using (a) the direct method, (b) the step-down method (allocate department A first), (c) the step-down method (allocate department B first), and (d) the reciprocal metho 2. An outside company has offered to supply all the power needed by the Milton Company and to provide all the services of the present pow department. The cost of this service will be $80 per kilowatt-hour of power. Should Milton accept? Explain. DIRECT METHOD
Direct Charges Allocation of A Allocation of B Total
STEP-DOWN (A FIRST)
Direct Charges Allocation of A Allocation of B Total
STEP-DOWN (B FIRST)
Direct Charges Allocation of B Allocation of A Total
RECIPROCAL METHOD A=210000+0.6B B=90000+0.2A
A=210000+0.6(90000+0.2A) A=210000+0.6(90000+0.2A) A= 210000+54000+0.12A e direct method, 0.88A=264000 nd (d) the reciprocal method? A= 300000 services of the present power B=90000+0.2(300000) B=90000+ 60000 B= 150000
Allocation of A Allocation of B Total
ESSAY The cost of power is 72 per kwh which is computed by (90000/1 Compared to the $80 offered by by an outside company, Milton Targeted Power Units (Outsource)
X 125 Y 375 A 600 Total Units 1,100 Offered cost 80 Total Costs 88,000 A B X Y Total 210000 90000 300000 -210000 131250 78750 0 -90000 22500 67500 0 153750 146250 300000
A B X Y Total 210000 90000 300000 -210000 42000 105000 63000 0 -132000 33000 99000 0 0 0 138000 162000 300000
A B X Y Total 210000 90000 300000 54000 -90000 9000 27000 0 -264000 165000 99000 0 0 0 174000 126000 300000
A=750/1250 0.6 B=200/1000 0.2
A B X Y 210000 90000 -300000 60000 150000 90000 90000 -150000 15000 45000 0 0 165000 135000
ch is computed by (90000/1250 kwh) plus the materials-handling cost.
an outside company, Milton company will be able to incur lower costs. Targeted Power Units (Outsource)
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