Support Department Cost Allocation Using the Step or Sequential Method

The step or sequential method requires that support departments be ranked and that the highest ranking support department be allocated first to all lower ranking support departments and the producing departments. Then the highest ranking support department is closed and the second-highest ranking support department is allocated to lower ranking support departments and the producing departments. This continues until all support department cost has been allocated to the producing departments. The sequential method takes partial account of support department reciprocity. Reciprocity occurs when one support department uses the services of another support department. For example, Maintenance uses HR and HR may use the services of Maintenance. The sequential method does not take full account of reciprocity because lower ranking support department costs are never allocated to higher ranking support departments.

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 sequential method of support department cost allocation, and support departments are ranked in order of direct overhead cost (from high to low). Maintenance is allocated based on machine hours, HR on 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.

Calculate the allocation ratios to five significant digits and fill them into the following table (If an amount box does not require an entry, leave it blank or enter "0".) :

Maintenance

HR

GF

Fabricating

Assembly

General Factory

fill in the blank 85167ef39ffd036_3

fill in the blank 85167ef39ffd036_4

fill in the blank 85167ef39ffd036_5

fill in the blank 85167ef39ffd036_6

fill in the blank 85167ef39ffd036_7

Human Resources

fill in the blank 85167ef39ffd036_8

fill in the blank 85167ef39ffd036_9

fill in the blank 85167ef39ffd036_10

fill in the blank 85167ef39ffd036_11

fill in the blank 85167ef39ffd036_12

Maintenance

fill in the blank 85167ef39ffd036_13

fill in the blank 85167ef39ffd036_14

fill in the blank 85167ef39ffd036_15

fill in the blank 85167ef39ffd036_16

fill in the blank 85167ef39ffd036_17

Using the allocation ratios, fill in the following table to allocate support department costs to the producing departments. (Round all allocated amounts to the nearest dollar. Leave cells blank that do not require an entry.)

Maintenance

HR

GF

Fabricating

Assembly

Direct overhead cost

$80,000

$120,000

$260,000

$93,400

$56,700

Allocate:

General Factory

fill in the blank 85167ef39ffd036_18

fill in the blank 85167ef39ffd036_19

fill in the blank 85167ef39ffd036_20

fill in the blank 85167ef39ffd036_21

fill in the blank 85167ef39ffd036_22

Human Resources

fill in the blank 85167ef39ffd036_23

fill in the blank 85167ef39ffd036_24

fill in the blank 85167ef39ffd036_25

fill in the blank 85167ef39ffd036_26

fill in the blank 85167ef39ffd036_27

Maintenance

fill in the blank 85167ef39ffd036_28

fill in the blank 85167ef39ffd036_29

fill in the blank 85167ef39ffd036_30

fill in the blank 85167ef39ffd036_31

fill in the blank 85167ef39ffd036_32

Total after allocation

fill in the blank 85167ef39ffd036_33

fill in the blank 85167ef39ffd036_34

fill in the blank 85167ef39ffd036_35

fill in the blank 85167ef39ffd036_36

fill in the blank 85167ef39ffd036_37

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 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 $fill in the blank 85167ef39ffd036_38 per machine hour

Assembly overhead rate $fill in the blank 85167ef39ffd036_39 per direct labor hour