(APPENDIX 16B) SUPPORT DEPARTMENT COST ALLOCATION: COMPARISON OF METHODS OF ALLOCATION Bender Automotive Works Inc. manufactures a variety of front-end assemblies for automobiles. A front-end assembly is the unified front of an automobile that includes the headlamps, fender, and surrounding metal/plastic. Bender has two producing departments: Drilling and Assembly. Usually, the front-end assemblies are ordered in batches of 100.

Two support departments provide support for Bender’s operating units: Maintenance and Power. Budgeted data for the coming quarter follow. The company does not separate fixed and variable costs.

Support Departments Producing Departments Maintenance Power Drilling Assembly Overhead costs $320,000 $400,000 $163,000 $ 90,000 Machine hours — 22,500 30,000 7,500 Kilowatt-hours 40,000 — 36,000 324,000 Direct labor hours — — 5,000 40,000 The predetermined overhead rate for Drilling is computed on the basis of machine hours; direct labor hours are used for Assembly.

Recently, a truck manufacturer requested a bid on a three-year contract that would supply front-end assemblies to a nearby factory. The prime costs for a batch of 100 frontend assemblies are $1,817. It takes two machine hours to produce a batch in the drilling department and 50 direct labor hours to assemble the 100 front-end assemblies in the assembly department.

Bender’s policy is to bid full manufacturing cost, plus 15 percent.

Required:

. Prepare bids for Bender Automotive Works by using each of the following allocation methods:

a. Direct method.

b. Sequential method.

. Which method most accurately reflects the cost of producing the front-end assemblies? Why?

Cases Case