ABC Company operates two service departments, quality control and maintenance, a

Question

 ABC Company operates two service departments, quality control and maintenance, and two production departments, cutting and finishing. Service department costs are allocated to production departments using a sequential two-stage allocation method. Quality control department costs are allocated on the basis of number of inspections and maintenance department costs are allocated on the basis of machine hours. In the second stage, departmental overhead rates for the two production departments are calculated using direct labor hours as the activity for each department. Information for the four departments is given below:                               Q.C.   Maintenance    Cutting   Finishing Directly trace overhead   $142,000   $240,000     $316,800   $339,600   Number of inspections        5,000      5,000       14,000      6,000 Machine hours               50,000     20,000       22,000     28,000 Direct labor hours            N/A        N/A        20,000     10,000  The company has just completed job #603, which required 20 direct labor hours in the cutting department and 50 direct labor hours in the finishing department. The direct material and direct labor cost for job #603 totaled $1,840. Job #603 consisted of a total of 100 units. 70 of those units were sold to a customer. ABC Company sets the selling prices of its products at 150% of manufacturing cost.  Calculate the amount of gross profit ABC Company earned on the sale of the 70 units from job #603.

Explanation / Answer

Solution:

From Service Department Cost Allocation - Sequential alloction (Allocation of quality control first) Service Department Production Departments QC Maintenance Cutting Finishing Direct charges of department $142,000.00 $240,000.00 $316,800.00 $339,600.00 Quality Control (5:14:6) -$142,000.00 $28,400.00 $79,520.00 $34,080.00 Maintenance (22:28) -$268,400.00 $118,096.00 $150,304.00 Total $0.00 $0.00 $514,416.00 $523,984.00

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