QUESTION ONE:

West Highland Food Ltd (WHF) is a medium size local company that make a variety of Scottish foods including Scottish pies, Neeps and Tatties and Cranachan. Recently, they have upgraded their manufacturing facilities and automated many of their process.

At the monthly executive meeting, you (the management accountant) raised concerns about what these changes mean for the simple cost system that WHF is using. Currently a 100% markup is added to the direct materials and direct labour costs to cover the overheads and to achieve the target profit margin.

At the meeting it was decided that you would investigate alternative methods of incorporating overheads due to these changes. You gathered the following data:

After talking to the supervisors/managers of the four departments you determine that the most appropriate cost can be achieved by using individual production department overhead rates. These rates are determined after support department costs have been allocated to the production departments.

You decide that personnel costs will be allocated using the number of employees and the storeroom costs will be allocated using the number of requisitions. Food preparation and baking are to be allocated based on direct labour-hours.

	Direct labour-hours	Number of employees	Number of requisitions
Food reparation	15,000	100	1,000
Baking	5,000	50	2,000
Total	20,000	150	3,000

The production manager also asks you to provide the total overhead costs for the following jobs using your new individual production department overhead rates of support department cost allocation.

Direct manufacturing labour-hours
	Food preparation	Baking
Job 88	18	2
Job 89	15	5

Allocate the two support departments costs to the two production departments using the direct method.

Calculate the overhead rate per direct labour-hour for the food preparation and baking production departments.

Based on the above information about Job 88 and Job 89, calculate the total overhead cost for each job using the overhead rates developed in part b.

In addition to the direct method, identify TWO other department-based methods that can be used for allocating support department costs to production departments AND discuss which of the three methods would be appropriate for WFH to use and why.