The managers of Rochester Manufacturing are discussing ways to allocate the cost
ID: 2594430 • Letter: T
Question
The managers of Rochester Manufacturing are discussing ways to allocate the cost of service departments, such as Quality Control and Maintenance, to the production departments. To aid them in this discussion, the controller has provided the following information: Quality Control Maintenance Machining Assembly Total Budgeted overhead costs before allocation $350,000 $200,000 $400,000 $300,000 $1,250,000 Budgeted machine hours -- -- 50,000 -- 50,000 Budgeted direct labor hours -- -- -- 25,000 25,000 Budgeted hours of service: Quality Control -- 7,000 21,000 7,000 35,000 Maintenance 10,000 -- 18,000 12,000 40,000 Using the direct method, the total amount of overhead allocated to each machine hour at Rochester would be A. $2.40 B. $5.25 C. $8.00 D. $15.65
Explanation / Answer
Answer : D) $15.65
Under the direct method the service department costs are not allocated to other service departments. As such, we need to make certain that when we determine the ratio to allocate the costs to the production departments, we do not include the usage by the other service departments. In order to determine the amount of overhead allocated for each machine hour, we will need to allocate the service department costs to the production departments - especially machining. We will then add the machining department's overhead to the overhead allocated to it, and divide this by the number of machine hours. The assembly department used QC7,000 hours and the machining department used QC 21,000 hours.
Thus, machining will get 75% (or $262,500)of the QC costs. Assembly used the maintenance department a total of 12,000 hours and machining used the maintenance department for 18,000 hours. Thus, machining will get 60% of the maintenance costs (or$120,000). In total, therefore, the machining department received $382,500 from the service departments.
Adding to this the $400,000 of overhead that the machining department had itself, there is $782,500 that needs to be allocated to the 50,000 machine hours.
= $782,500/50,000 hours
= $15.65
= a rate of $15.65 per machine hour
the total amount of overhead allocated to each machine hour at Rochester = $15.65
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