Howard Inc. has two support departments and two producing departments. Informati
ID: 2462482 • Letter: H
Question
Howard Inc. has two support departments and two producing departments. Information for each department for the year is as follows:
Support Departments Producing Departments
The company does not divide costs into fixed and variable components.
Maintenance costs are allocated based on machine hours, and pesonnel costs are allocated based on the number of employees.
Predetermined overhead rates for the producing departments are based on direct labor hours.
Required
A. Allocate the support department costs using the direct method. Calculate the pre determined overhead rate for the producing departments.
B. Allocate the support-department costs using the sequential method and starting with the Personnel Department. Calculate the predetermined overhead rate for the producing departments.
C. Allocate the support-department costs using the reciprocal method. Calculate the pre determined overhead rate for the producing departments.
Maintenance Personnel Cutting Assembly Budgeted overhead 160,000 300,000 600,000 800,000 Direct Labor Hours 16,000 2,000 40,000 50,000 Machine Hours 40,000 10,000 90,000 30,000 Number of employees 10 20 140 160Explanation / Answer
Answer A - Direct Allocation Calculation of factors to apportion service department cost Department Cutting Assembly Maintenance Personnel Total Maintenance 600000 800000 300000 1700000 Personnel 600000 800000 160000 1560000 Department Cutting Assembly Maintenance Personnel Maintenance 35% 47% 18% Personnel 38% 51% 10% Department Sum of percentage Cutting Assembly Maintenance 35+47 = 82 35/82 47/82 Personnel 38+51 = 89 38/89 51/89 We now multiply the service department overhead by above factors to arrive at the allocated overhead to each production department Department Cutting Assembly Maintenance Personnel Allocated overehad 6,00,000 8,00,000 1,60,000 3,00,000 Maintenance 68,293 91,707 -1,60,000 Personnel 1,28,090 1,71,910 -3,00,000 Total 7,96,383 10,63,617 - - Direct Labour hours 40000 50000 Predetermined overhead rate 19.91 21.27 Answer B - Sequential method Department Cutting Assembly Maintenance Personnel Allocated overehad 6,00,000 8,00,000 1,60,000 3,00,000 Maintenance 1,27,258 42,419 -1,69,677 Personnel 1,35,484 1,54,839 9,677 -3,00,000 Total 8,62,742 9,97,258 0 - Direct Labour hours 40000 50000 Predetermined overhead rate 21.57 19.95 Answer c - Reciprocal method Assume maintenance department cost be X and personnel department cost be Y Hence, X = 160000 + (3% Y) Y = 300000 + (8% X) By putting the value of Y in equation 1 X = 160000 + [3% (300000+(8%X)] X = 160000 + (9000+0.0024X) X = 169000 + 0.0024X 0.9976X = 169000 X = 169407 Y = 300000 + (8% *169407) = 313553 Service Department Production department Maintenance Personnel Cutting Assembly Original Cost 160000 300000 600000 800000 - Allocation of Maintenance department cost -169407 13,353 1,17,041 39,014 - Allocation of personnel department cost 9407 -313353 1,42,855 1,61,091 Total Cost 0 0 8,59,895 10,00,105 Direct Labour hours 40000 50000 Predetermined overhead rate 21.50 20.00
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