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eLearning Question 1 The Central Valley Company has prepared department overhead budgets for normal-volume levels before allocations, as follows: Support departments: Building and grounds Personnel General factory administration Cafeteria - operating loss Storeroom Total Operating departments: Machining Assembly Total Total for both departments $10,000 1,000 26,090 1,640 2,670 41,400 $34,700 48,900 83,600 $125,000 Management has decided that the most appropriate inventory costs are achieved by 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 Manufacturi ng labour hours 0 0 0 0 0 5,000 15,000 20,000 Building and grounds Personnel* General factory adminstration Cafeteria Storeroom Machining Assembly Total Number of Square feet Manufacturi Number of employees of floor ng labour requisitions space hours occupied 0 0 0 0 0 2,000 0 0 35 7,000 0 0 10 4,000 1,000 0 5 7,000 1,000 0 50 30,000 8,000 2,000 100 50,000 17,000 1,000 200 100,000 27,000 3,000 *Basis used is number of employees. 1 Using direct method allocate support department costs. Allocate the support departments in the order given in this problem. Use the allocation base for each support department you think is most appropriate. 2 Allocate support department costs by the step-down method. Develop overhead rates per direct manufacturing labor-hour for machining and assembly. Allocate the support departments in the order given in this problem. Use the allocation base for each support department you think is most appropriate. 3 Based on the following information about two jobs, determine the total overhead costs for each job by using rates developed (a) in requirement 1 and (b) requirement 2. Job 88 Job 89 Direct Manufacturing Labor Hours Machining Assembly 18 2 3 17 eLearning Question 1 Central Valley Company Data Building and Personnel grounds Direct mfg. labor-hours Number of employees Sq. feet of floor space occupied Mfg. labor- hours Number of req. 0 0 0 0 0 0 0 2,000 0 0 Building and Personnel grounds 1 Direct method Allocation Base Budgeted amount Bldg. and grounds Personnel General plant admin. Cafeteria Storeroom Total Overhead rate per direct labor-hour $10,000 ($10,000) $1,000 General plant admin. 0 35 7,000 0 0 General plant admin. $26,090 2 Step down method Budgeted amount Bldg. And grounds floor space occupied Personnel General plant admin. Cafeteria Storeroom Total Overhead rate per direct labor-hour 3 Overheads for the two jobs Building and General grounds Personnel plant admin. $10,000 $1,000 $26,090 $10,000 200 700 Cafeteria operating loss 0 10 4,000 1,000 0 Storeroom 0 5 7,000 1,000 0 Machining 5,000 50 30,000 8,000 2,000 Assembly 15,000 100 50,000 17,000 1,000 Cafeteria Storeroom Machining Assembly operating loss $1,640 $2,670 $34,700 $48,900 3,750 6,250 Cafeteria operating loss Storeroom $1,640 $2,670 400 700 Machining $34,700 3,000 Assembly $48,900 5,000 Direct manufacturing labor-hours Machining Assembly Job 88 18 2 Job 89 3 17 Direct method Job 88 Job 89 Total Step-down method eLearning Question 2 E-Books, an online book retailer, has two operating departmentsCorporate sales and Consumer salesand two support departmentsHuman Resources and Information Systems. Each of the sales departments conducts merchandising and marketing operations independently. E-book uses number of employees to allocate Human Resources costs and processing time to allocate information systems costs. The following data are available for March. Support Departments Operating Departments Human Resources Information Systems Corporate Sales Consumer sales $80,000 $240,000 $600,000 $400,000 Budgeted processing time (in minutes) 400 200 1,600 2,400 Number of employees 20 25 75 50 Budgeted costs Required: (a) Using the direct method, what amount of support department costs will be allocated to the operating departments? (b) Using the step-down method, what amount of support department costs will be allocated to the operating departments if the service department with the highest dollar amount is allocated first? (c) Using the Reciprocal-services method, what amount of support department costs will be allocated to the operating departments (d) Which of the three methods of service department cost allocation results in the most accurate overhead rates? Why? eLearning Question 2 Central Valley Company Data Budgeted costs Budgeted processing time (in minutes) Number of employees a. Direct method Budgeted amount Allocation Base Human Resources $80,000 400 20 Information Systems $240,000 200 25 Corporate Sales $600,000 1,600 75 Human Resources Information Systems Corporate Sales Human Resources Information Systems Corporate Sales Human Resources Information Systems Total overheads of the operating departments b. Step down method Allocation Base Budgeted Costs Information Systems Cost after 1st allocation Human Resources Total overheads of the operating departments c. Reciprocal-services method: % of services provided by service departments to other departments Data Human Resources 80000 (100%) 9% Budgeted costs Number of employees Budgeted processing time Equations: HR = 80,000 + 9%IS IS = 240,000 +17%HR where HR denotes the total cost of the Human Resource Department IS denotes the total cost of the Information Systems Department Solution of equations: Human Resources $ Information Systems $ IS proportion HR proportion HR = IS = - Information Corporate Systems Sales 240000 600000 17% 50% (100%) 36% Reciprocal-services method: Budgeted Costs Allocation of HR Department costs Allocation of IS Department costs Total overheads of the operating departments d. Human Resources $80,000 Information Corporate Systems Sales $240,000 $600,000 Which of the three methods of service department cost allocation results in the most accurate overhead rates? Why? Consumer sales $400,000 2,400 50 Consumer sales Consumer sales Consumer sales 400000 33% 55% Consumer sales $400,000 te overhead rates? Why