Support Department Cost Allocation: Comparison of Methods of Allocation

Bender Automotive Works Inc. manufactures a variety of front-end assemblies for automobiles. A front-end assembly is the unified front of an automobile that includes the headlamps, fender, and surrounding metal/plastic. Bender has two producing departments: Drilling and Assembly. Usually, the front-end assemblies are ordered in batches of 100.

Two support departments provide support for Bender's producing departments: Maintenance and Power. Budgeted data for the coming quarter follow. The company does not separate fixed and variable costs.

	Support Departments			Producing Departments
	Maintenance	Power		Drilling	Assembly
Overhead costs	$320,000	$400,000		$163,000	$90,000
Machine hours	-	22,500		30,000	7,500
Kilowatt-hours	40,000	-		36,000	324,000
Direct labor hours	-	-		5,000	40,000

The predetermined overhead rate for Drilling is computed on the basis of machine hours. Direct labor hours are used for Assembly.

Recently, a truck manufacturer requested a bid on a 3-year contract that would supply front-end assemblies to a nearby factory. The prime costs for a batch of 100 front-end assemblies are $1,817. It takes two machine hours to produce a batch in the drilling department and 50 direct labor hours to assemble the 100 front-end assemblies in the assembly department.

Bender's policy is to bid full manufacturing cost, plus 15%.

1. Prepare bids for Bender by using each of the following allocation methods:

(a) Direct method. (Note: Round allocation ratios, and the job cost components to two decimal places, if rounding is required.)

Bender Automotive Works Inc.
Direct Method
Prime costs	$
Drilling
Assembly
Total cost	$
Markup
Bid price	$

(b) Sequential method, allocating power costs first. (Note: Round allocation ratios, and the job cost components to two decimal places, if rounding is required.)

Bender Automotive Works Inc.
Sequential Method
Prime costs	$
Drilling
Assembly
Total cost	$
Markup
Bid price	$