Allocating costs of support departments; step-down and direct methods. The Central Valley Company

has prepared department overhead budgets for budgeted-volume levels before allocations as follows:

Support departments:

Building and grounds $45,000

Personnel 300

General plant administration 37,320

Cafeteria: operating loss 970

Storeroom 9,990 $ 93,580

Operating departments:

Machining $36,600

Assembly 46,000 82,600

Total for support and operating departments $176,180

Management has decided that the most appropriate inventory costs are achieved by using individualdepartment

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:

Department/ Direct Manufacturing Labor-Hours/ Number of Employees/ Square Feet of Floor Space Occupied/ Manufacturing Labor-Hours/ Number of Requisitions

Building and grounds 0 0 0 0 0

Personnel a 0 0 2,500 0 0

General plant administration 0 40 12,000 0 0

Cafeteria: operating loss 0 10 5,000 3,000 0

Storeroom 0 5 6,000 2,000 0

Machining 8,000 55 22,000 13,000 6,000

Assembly 32,000 140 202,500 26,000 4,000

Total 40,000 250 250,000 44,000 10,000

aBasis used is number of employees.

1. Using the step-down method, allocate support-department costs. Develop overhead rates per direct

manufacturing labor-hour for machining 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 Manufacturing Labor-Hours

Machining Assembly

Job 88 17 7

Job 89 9 20

4. The company evaluates the performance of the operating department managers on the basis of how

well they managed their total costs, including allocated costs. As the manager of the Machining

Department, which allocation method would you prefer from the results obtained in requirements 1

and 2? Explain.