A company has two producing department, mechanical (M) division and electronic (

Question

A company has two producing department, mechanical (M) division and electronic (E) division, in addition to three service departments, facility management (FM) division, receiving and handling (RH) division, and human resource (HR) division. The company’s main production activity is assembling, from a variety of components purchased. The assembly work in the mechanical division heavily relies on labor force. Its costs depend primarily on the direct-labor hours. On the other hand, the electronic division is highly automated and its costs can be mainly determined by the number of components used in each product. The costs of facility management depend primarily on the space used. The costs of receiving and handling division depend primarily on the number of components handled. The costs of human resource depend primarily on the labor hours.
Two products, PM1 and PM2, are produced in the mechanical division. Another two products, PE1 and PE2, are produced in the electronic division. The material costs, number of components and labor hours used are listed in the table below.

The company’s budget for 20X6 has been prepared and listed below.

Hint: FM is the only service department that its cost is allocated to other service departments.
(1) Allocate the costs of service departments using the step-down method.
(2) Compute the cost per direct-labor hour in the mechanical division and the cost per component in the electronic division.
(3) Compute the cost per unit of the product for all four products.

Direct-Materials Cost Number of Components Direct-Labor Hours Pm1 $118 7 3.0 Pm2 $132 9 5.0 Pe1 $110 19 0.6 Pe2 $165 21 0.8

Explanation / Answer

1. Allocation of service department costs using step down method:

2. Mechanical division: Cost per direct labor hour = $ 1,041,686 / 28,000 = $ 37.20

Electronic Division : Cost per component = $ 883,314 / 40 = $ 22,082.85

3. Cost per unit:

Basis of allocation FM RH HR Mechanical Electronic Direct department costs $ 110,000 $ 140,000 $ 130,000 $ 825,000 $ 720,000 Allocation of FM department costs Space occupied (110,000) 6,111 2,037 66,204 35,648 Allocation of RH department costs Number of components handled (146,111) 41,746 104,365 Allocation of HR department costs (132,037) 108,736 23,301 Total producing department costs 1,041,686 883,314

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