Manufactures two products, cleverly named Product X and Product Y. Three support departments support the production departments: General Factory, Purchasing and Power.

Based on the amount of cross usage of support departments, they have determined that General Factory provides the most value of services to the other support departments, followed by the Power. Purchasing provides the 

least amount of services to the other support areas.

 

The following budgeted data is available for the upcoming year:

Support Department Producing Departments

General

Factory Purchasing Power Product X Product Y Overhead $ 420,000 $180,000 $ 90,000 $ 141,600 $ 175,000

Square feet - 3,000 3,000 9,600 8,400

Machine hours 1,403 1,34 - 8,000 24,000

Purchase orders 40 7 20 60 120

The company does not make any attempt to break overhead into fixed and variable components for allocation purposes. General factory is a "catch all" category which is allocated on the basis of square feet. Purchasing 

department costs are allocated on the basis of purchase orders, while machine hours are the driver for Power.

 

The producing departments for product X and Y use machine hours for determining their departmental predetermined application rates.

Since you are doing this by hand, round all allocation percentages to 4 decimal places if necessary and use your rounded numbers in subsequent computations.(If you are using Excel, use the ROUND function to make sure that 

Excel uses only 4 decimal points in its computations.)

 

Required:

1.Assuming that the support department allocations are being done prior to the start of the year for product costing purposes, allocate the support department charges to the producing departments using a) the direct method 

and b) the step method.

 

2.Determine the overhead application rates for Product X and Product Y

3.Assume that the Step-Down (Sequential) method was used, and that Product X and Product Y actually utilized a total of 19,000 square feet during the period. Furthermore, Purchasing and Power each utilize 3,000 square feet, as budgeted. Actual costs in the General Factory department totaled $435,000, versus $420,000 as budgeted. Evaluate the cost controls in General Factory. Show computations to defend your position.

4.Let's take the General Factory as an example. ASSUME that 80% of those costs are FIXED. Humor me - I'm an old man. Would the methods we studied give a proper allocation? WHY or WHY NOT? Can you think of something that might work better?

Answer rating: 100% (QA)

1 Support department allocations a Direct Method General Factory Allocated to GF based on actual SF ... View the full answer