15-30 Allocating costs of support departments; step-down and direct methods.
Support departments:
Building and grounds
Personnel
General plant administration
Cafeteria: operating loss
Storeroom
Operating departments:
Machining
Assembly
Total for support and operating departments
Direct
Manufacturing Number of
Department Labor-Hours Employees
Building and grounds 0 0
Personnel 0 0
General plant administration 0 40
Cafeteria: operating loss 0 10
Storeroom 0 5
Machining 8,000 55
Assembly 32,000 140
Total 40,000 250
1. STEP-DOWN METHOD
SU
COSTS ALLOCATION BASE TOTAL BUILDING AND
GROUNDS
176,180 45,000
Allocate Building Sq. ft. of Floor Space Occ. - (45,000)
Allocate Personnel No. of Employees -
Allocate GPA Manuf. Labor-Hrs -
Allocate C:OL No. of Employees -
Allocate Storeroom No. of Requisitions -
Total 176,180 -
Direct Labor Hours
Overhead Rates
2. DIRECT METHOD
SU
COSTS ALLOCATION BASE TOTAL BUILDING AND
GROUNDS
176,180 45,000
Allocate Building Sq. ft. of Floor Space Occ. - (45,000)
Allocate Personnel No. of Employees -
Allocate GPA Manuf. Labor-Hrs -
Allocate C:OL No. of Employees -
Allocate Storeroom No. of Requisitions -
Total 176,180 -
Direct Labor Hours
Overhead Rates
3. TOTAL OVERHEAD COSTS FOR EACH JOB
A. Step-down Method
MACHINING
Direct Manufacturing Labor Total Overhead
Rate
Hours Costs
Job 88 17 7.69 130.67
Job 89 9 7.69 69.18
B. Direct Method
MACHINING
Direct Manufacturing Labor Total Overhead
Rate
Hours Costs
Job 88 17 7.48 127.08
Job 89 9 7.48 67.28
4. PREFERRED ALLOCATION METHOD TO USE (FOR MACHINING DEPARTMENT)
The manager of the Machining Department would prefer the direct method as it results to a lower amount of
departments' costs being allocated to the Machining Department than the step-down method. This is also evident u
when the overhead rate per direct manufacturing labor-hour for the Machining Department was computed under th
nd direct methods.
45,000
300
37,320
970
9,990 93,580
36,600
46,000 82,600
176,180
Square Feet of
Floor Space Manufacturing Labor- Number of
Occupied Hours Requisitions
0 0 0
2,500 0 0
12,000 0 0
5,000 3,000 0
6,000 2,000 0
22,000 13,000 6,000
202,500 26,000 4,000
250,000 44,000 10,000
SUPPORT DEPARTMENTS
GENERAL PLANT CAFETERIA:
PERSONNEL STOREROOM
ADMINISTRATION OPERATING LOSS
300 37,320 970 9,990
450 2,160 900 1,080
(750) 120 30 15
(39,600) 2,700 1,800
(4,600) 115
(13,000)
- - - -
SUPPORT DEPARTMENTS
GENERAL PLANT CAFETERIA:
PERSONNEL STOREROOM
ADMINISTRATION OPERATING LOSS
300 37,320 970 9,990
(300)
(37,320)
(970)
(9,990)
- - - -
ASSEMBLY
Direct Manufacturing Total Overhead
Rate
Labor Hours Costs
Job 88 7 3.58 25.09
Job 89 20 3.58 71.68
ASSEMBLY
Direct Manufacturing Total Overhead
Rate
Labor Hours Costs
Job 88 7 3.64 25.46
Job 89 20 3.64 72.74
HINING DEPARTMENT)
as it results to a lower amount of support
wn method. This is also evident upon the results
partment was computed under the two methods.
OPERATING DEPARTMENTS
MACHINING ASSEMBLY
36,600 46,000
3,960 36,450
165 420
11,700 23,400
1,265 3,220
7,800 5,200
61,490 114,690
8,000 32,000
7.69 3.58
OPERATING DEPARTMENTS
MACHINING ASSEMBLY
36,600 46,000
4,410 40,590
85 215
12,440 24,880
274 696
5,994 3,996
59,802 116,378
8,000 32,000
7.48 3.64
15-31 Support-department cost allocations; single-department cost pools; direct, ste
REQUIREMENT #1. ALLOCATION OF COSTS TO DEPARTMENTS
a. DIRECT METHOD
ALLOCATION SUPPORT DEPARTMENTS OPERATING DEPARTMEN
COSTS TOTAL
BASE A B X
2,500,000 210,000 90,000 1,250,000
Allocate A - (210,000) 131,250
Allocate B - (90,000) 22,500
Total 2,500,000 - - 1,403,750
b. STEP-DOWN METHOD (ALLOCATE DEPT. A FIRST)
ALLOCATION SUPPORT DEPARTMENTS OPERATING DEPARTMEN
COSTS TOTAL
BASE A B X
2,500,000 210,000 90,000 1,250,000
Allocate A - (210,000) 42,000 105,000
Allocate B - (132,000) 33,000
Total 2,500,000 - - 1,388,000
c. STEP-DOWN METHOD (ALLOCATE DEPT. B FIRST)
ALLOCATION SUPPORT DEPARTMENTS OPERATING DEPARTMEN
COSTS TOTAL
BASE A B X
2,500,000 210,000 90,000 1,250,000
Allocate B - 54,000 (90,000) 9,000
Allocate A - (264,000) 165,000
Total 2,500,000 - - 1,424,000
d. RECIPROCAL METHOD
Let A = Total costs of Materials-handling Department
Let B = Total Costs of Power-generating Department
A = 210,000 + 0.6B
B = 90,000 + 0.2A
A = 210,000 + 0.6 (90,000 + 0.2A) B = 90,000 + 0.2 (300,000)
A = 210,000 + 54,000 + 0.12A B = 90,000 + 60,000
0.88A = 264,000 B = 150,000
A = 300,000
ALLOCATION SUPPORT DEPARTMENTS OPERATING DEPARTMEN
COSTS TOTAL
BASE A B X
2,500,000 210,000 90,000 1,250,000
Allocate A - (300,000) 60,000 150,000
Allocate B - 90,000 (150,000) 15,000
Total 2,500,000 - - 1,415,000
REQUIREMENT #2.
Milton Company should accept the offer of the outside company because the cost of producing
externally would result to lesser costs incurred than producing internally.
Cost of Service by outside company (per kilowatt-hour)
Cost per kWh
Department A 600 80 48,000
X 125 80 10,000
Y 375 80 30,000
Total 1,100 240 88,000
Cost of Service by internal production
Variable Indirect Labor and Indirect Mareials 15,000
Supervision 25,000
Depreciation 50,000
Total 90,000
pools; direct, step-down, and reciprocal methods.
RATING DEPARTMENTS
Y
950,000
78,750
67,500
1,096,250
RATING DEPARTMENTS
Y
950,000
63,000
99,000
1,112,000
RATING DEPARTMENTS
Y
950,000
27,000
99,000
1,076,000
RATING DEPARTMENTS
Y
950,000
90,000
45,000
1,085,000
