NOW ASSUME that the year is completed, the company decided to use the Direct Method, and management is in the process of evaluating the performance of the Assembly and Finishing departments. Since these two departments are cost centers, they are evaluated strictly on the basis of how well they controlled costs during the year. Managerial bonuses are based in part, on these figures. As things turned out, as expected, the actual costs of the support departments were different than originally budgeted. Turns out that the people in the receiving department were very inefficient in their operations and, although we anticipated that the departmental costs would be about $160,000, they were in fact MUCH higher, $200,000. This was caused mainly by extravagant spending and inefficiency. Also, as it turned out, the Finishing Department had redesigned their department and, accordingly, only utilized an average of 5,000 square feet of floor space during the year. In addition, as expected, the number of receivers was different than originally budgeted for both production departments Direct overhead traceable to individual departments also was different than expected, as did the number of direct labor hours.

The following ACTUAL results were achieved:
Using the direct method only, answer the following:
3. You have been asked to assist in the evaluation of the cost control for the Assembly and Finishing Departments.
For this purpose, how much support department cost should be allocated to (charged to) the Assembly and
Finishing Departments for the year? HINT: How much SHOULD each of these departments be accountable
for?
4. Was there any difference between the amount of costs actually incurred by the support departments and the
amounts that you allocated to Assembly and Finishing? Does this sound “right”? Explain why this is so.
5. How much overhead was applied in both departments during the year?
6. Was overhead under- or over-applied? By how much?
General
Factory Receiving Assembly Finishing
Direct overhead 420,000$ 200,000$ 45,000$ 72,000$
Square footage 2,700 5,400 5,000
Number of receiving orders 300 1,700 850
Direct labor hours 24,000 41,000
Support Departments Producing Departments
ACTUAL COSTS FOR THE YEAR