Lilly Candies has three producing departments—mixing, cooking, and packaging, and five support departments. The following is the basic information on all departments (bases represent practical annual levels):

Number of Items Number of Square Feet Machine Labor Processed Employees Occupied Hours Hours Cafeteria 300 5 5,000 — =

Personnel 1,000 10 7,000 — =

Custodial Services 200 7 2,000 ~ =

Maintenance 2,500 15) 16,000 — =

Cost Accounting — 13 5,000 — =

Mixing 2,800 20 40,000 4,000 30,000 Cooking 2,700 10 30,000 10,000 20,000 Packaging 3,000 _20 20,000 6,000 50,000 Total 12,500 100 125,000 20,000 100,000 The budgeted overhead costs for the department are as follows for the coming year:

Fixed Variable Total Cafeteria $ 20,000 $ 40,000 $ 60,000 Personnel 70,000 20,000 90,000 Custodial Services 80,000 — 80,000 Maintenance 100,000 100,000 200,000 Cost Accounting 130,000 16,500 146,500 Mixing 120,000 20,000 140,000 Cooking 60,000 10,000 70,000 Packaging 25,000 40,000 65,000 Required:

1. Allocate the support-department costs to the producing departments using the direct method.

2. Compute a predetermined fixed overhead rate and a predetermined variable overhead rate. Assume that overhead is applied using direct labor hours for mixing and packaging and machine hours for cooking.

3. Allocate the support-department costs to the producing departments using the sequential method. (Hint: Allocate fixed costs in order of descending magnitude of direct fixed costs. Allocate variable costs in order of descending magnitude of direct variable costs.)

4. Compute predetermined fixed and variable overhead rates based on Requirement 3. Overhead is applied using direct labor hours for mixing and packaging and machine hours for cooking.

5. Assume that the prime costs for a batch of chocolate bars total $60,000. The batch requires 1,000 direct labor hours in mixing, 1,500 machine hours in cooking, and 5,000 direct labor hours in packaging. Assume that the selling price is equal to full manufacturing cost plus 30 percent. Compute the selling price of the batch assuming that costs are allocated using the direct method. Repeat using the sequential method. Comment on the implications of using different allocation methods, assuming that a markup of 30 percent is typical for the industry. Which allocation method do you think should be used?