“I can’t understand what’s happening here,” said Mike Holt, president of Severso

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“I can’t understand what’s happening here,” said Mike Holt, president of Severson Products Inc. “We always seem to bid too high on jobs that require a lot of labour time in the Finishing Department, and we always seem to get every job we bid on that requires a lot of machine time in the Milling Department. Yet we don’t seem to be making much money on those Milling Department jobs. I wonder if the problem is in our overhead rates.” Severson Products manufactures high-quality wood products to customers’ specifications. Some jobs take a large amount of machine work in the Milling Department, and other jobs take a large amount of hand-finishing work in the Finishing Department. In addition to the Milling and Finishing Departments, the company has three service departments. The costs of these service departments are allocated to other departments in the order listed below. For each service department, use the most appropriate allocation base:

4 1 can't understand what's happening here, said Mike Holt, president of Severson Products Inc We always seem to bid too high on jobs that require a lot of labour time in the Finishing Department, and we always seem to get every job we bid on that requires a lot of machine time in the Milling Department Yet we don't seem to be making much money on those Milling Department jobs. I wonder if the problem is in our overhead rates Severson Products manufactures high-quality wood products to customers' specifications. Some jobs take a large amount of machine work in the Milling Department, and other jobs take a large amount of hand- finishing work in the Finishing Department. In addition to the Milling and Finishing Departments, the company has three service departments. The costs of these service departments are allocated to other departments in the order isted below. For each service department, use the most appropriate allocation base Total Square Metres of Space Number of Machine Labour- HoursOccupied Employees Hours Hours 16,000 12,000 3,000 10,000 40,000 20,000 Cafeteria 25 40 60 9,000 Custodial Services Machinery Maintenance5.000 Milling Finishing. 30,000 100,000 100 160,000 20,000 40,000 70,000 300 170,000 85,000 525 200,000 90,000 Budgeted overhead costs in each department for the curent year are as follows Cafeteria Custodial Services Machinery Maintenance S 320,000 65.400 93,600 416,000 166,000 Milling Finishing Total budgeted cost S1,061,000 This represents the amount of cost subsidized by the company The company has always allocated service department costs to the operating departments(Millng and Finishing) using the direct method of allocation, because of its simplicity. Required: 1. Allocate service department costs to operating departments by the step-dowm method. Then compute predetermined overhead rates in the operating departments for the current year, using machine-hours as the allocation base in the Milling Department and direct labour-hours as the allocation base in the Finishing Department. (Round "Predetermined overhead rate" answers to 2 decimal places. Negative amounts should be indicated by a minus sign.) dial Cafeteria Milling Finishing Maintena Total costs before allocations Allocations Cafeteria Custodial Services Machinery Maintenance Total overhead after allocations Milling predetermined overhead rate Finishing predetermined overhead rate per machine hr per DLH

Explanation / Answer

1 Allocation under step down method Start with the service department having highest overhead cost Then select the next one having highest cost Service departments Operating departments Cafeteria Machinery maintenance Custodial services Milling Finishing Total costs before alocation 320000 93600 65400 416000 166000 Allocation: Cafeteria (Based on number of employees) (60/500,40/500,100/500,300/500) -320000 38400 25600 64000 192000 Machinery maintenance (Based on labour hours ) (9000/139000,30000/139000,100000/139000) -132000 8547 28489 94964 Custodial services (Based on square meter) (40000/60000,20000/60000) -99547 66365 33182 Total cost after allocation 0 0 0 574854 486146 Divide by machiine hours 160000 Divide by labour hours 70000 Predetermined overhead rate 3.59 6.94 2 Allocation under direct method: Service departments Operating departments Cafeteria Machinery maintenance Custodial services Milling Finishing Total costs before alocation 320000 93600 65400 416000 166000 Allocation: Cafeteria (Based on number of employees) (100/400,300/400) -320000 80000 240000 Machinery maintenance (Based on labour hours ) (30000/130000,100000/130000) -93600 21600 72000 Custodial services (Based on square meter) (40000/60000,20000/60000) -65400 43600 21800 Total cost after allocation 0 0 0 561200 499800 Divide by machiine hours 160000 Divide by labour hours 70000 Predetermined overhead rate 3.51 7.14 3 Step-down method: Milling department (2000*3.59) 7180 (Machine hours*Pre-determined overhead rate) Finishing department (13000*6.94) 90220 (Direct labour hours*Pre-determined overhead rate) Total overhead cost 97400 Direct method: Milling department (2000*3.51) 7020 (Machine hours*Pre-determined overhead rate) Finishing department (13000*7.14) 92820 (Direct labour hours*Pre-determined overhead rate) Total overhead cost 99840

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