Support Department Cost Allocation Using the Direct Method

Factory accountants usually allocate support department costs to the producing departments using one of three methods: the direct method, the sequential (or step) method, or the algebraic (or reciprocal) method. The objective is simple - to get all factory costs into the producing departments in order to calculate overhead rates and apply them to units produced. Why can't support departments allocate overhead costs to units produced?

Support departments don't make the product that the company is in business to produce and sell - only producing departments do that.

The direct method involves allocating overhead cost from the support departments to the producing departments. The direct method never allocates cost from one support department to another support department. As a result, it is the easiest of the three methods.

Let's use Porter Company, as an example. Porter has two producing departments - Fabricating and Assembly - and three support departments - Maintenance, Human Resources (HR) and General Factory (GF). Porter provided the following information on the five departments:

		Maintenance			HR			GF			Fabricating			Assembly
Direct overhead cost		$80,000			$120,000			$260,000			$93,400			$56,700
Machine hours		1,000			3,000			5,000			12,000			3,000
Direct labor hours		4,000			5,000			8,000			10,000			30,000
Square footage		500			2,500			10,000			12,000			18,000

Porter uses the direct method of support department cost allocation. Maintenance is allocated based on machine hours, HR on the basis of direct labor hours, and GF on the basis of square footage. The Fabricating overhead rate is based on machine hours and the Assembly overhead rate is based on direct labor hours.

Fill in the following table to allocate support department costs to the producing departments. (Round all allocation ratios to four significant digits and all allocated amounts to the nearest dollar. If an amount box does not require an entry, leave it blank or enter "0".)

		Maintenance			HR			GF			Fabricating			Assembly
Direct overhead cost		$80,000			$120,000			$260,000			$93,400			$56,700
Allocate:
Maintenance
Human Resources
General Factory
Total after allocation		$			$			$			$			$

Notice that after allocation, zero dollars remain in the support departments and all overhead cost has been allocated to the producing departments. As a check on your work, add up all direct overhead costs from the first line - it equals $610,100. Then add the totals after allocation - again, it equals $610,100.

Finally, calculate the overhead rates (rounded to the nearest cent) for Fabricating and Assembly.

Fabricating overhead rate $ per machine hour

Assembly overhead rate $ per direct labor hour