Boston Fabricators has two producing departments, P1 and P2 and one service depa

Question

Boston Fabricators has two producing departments, P1 and P2 and one service department, S1. Estimated direct overhead costs per month are as follows: P1=$150000 P2=250000 S1=91000 Also other data availabe are: Number of employees for P1=75 and for P2=25 Production Capacity for P1=50000 units and for P2=30000 units. Space occupied for P1=2500 sqft and for P2=7500 sqft. Five year avg percent of S1's service output used for P1=65% and for P2=35%. Please find: 1- for each of the following allocation bases, determine the total estimated overhedd cost for p1 and p2 after allocating s1 cost to the producing departments. 1-number of emplyees 2-production capacity in units 3-space occupied 4-five year average percentage for s1 service used. 5-estimated direct overhead costs. b- for each of the five allocation bases, explain the circumstances under which each allocation base might be most appropriately used to allocate service department cost in a manufacturing plant such as boston fabricators. Also, discuss the advantages and disadvantages that might result from using each of the allocation bases.

Explanation / Answer

Particulars P1 P2 S1 Direct overhead cost per month $150,000.00 $250,000.00 $91,000.00 Number of employees 75 25 Production capacity 50000 30000 Space occupied 2500 7500 Five year avg % of S1 service used 65% 35% Basis of allocation P1 P2 Calculation formula Suitability of the allocation method Number of employees base $68,250.00 $22,750.00 P1=[91,000/(75+25)]*75 for P2 [91,000/(75+25)]*25 If the service department cost is dependent on the number of employees, then it would be apt to use the employee base as the overhead allocator Direct ovehead cost $150,000.00 $250,000.00 Total $218,250.00 $272,750.00 Production capacity in units basis $56,875.00 $34,125.00 P1=[91,000/(50000+30000)]*50000 for P2 [91,000/(50000+30000)]*30000 If the service department cost is dependent on the number of units that are serviced in it, then this would be the apt basis for allocation of service department cost Direct ovehead cost $2,500.00 $7,500.00 Total $59,375.00 $41,625.00 Space occupied basis $22,750.00 $68,250.00 P1=[91,000/(2500+7500)]*2500 for P2=[91,000/(2500+7500)]*7500 If the service department cost varies with that of the space used, then space occupied is the apt basis for allcation of overhead cost. Direct ovehead cost $150,000.00 $250,000.00 Total $172,750.00 $318,250.00 Five year aveg%basis $59,150.00 $31,850.00 P1=[91,000*65%] P2= 91,000*35% If the usage of service department is known and is remaining constant over the years, then this would be the apt basis to allcate the overhead cost Direct ovehead cost $2,500.00 $7,500.00 Total $61,650.00 $39,350.00 Estimated Direct overhead cost basis $34,125.00 $56,875.00 P1= (91,000(150000+250000))*150000 P2=(91,000/(150000+250000)) *250000 If the service department cost is going to vary depending on the production departments overhead costs, then this would be the apt basis for allocation of the service department overhead cost Direct ovehead cost $150,000.00 $250,000.00 Total $184,125.00 $306,875.00

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