Howard Inc. has two support departments and two producing departments. Informati

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 20 140 160

Explanation / Answer

A) Under direct method:

Calculation of the ratios based on which the service department costs will be allocated to producing departments:

Maintenance department cost will be allocated based on the ratio of the machine hours used in the production departments.

Cutting Department : Assembly Department = 90000 hours : 30000 hours = 3 : 1

Maintenance department overhead cost allocated to:

Cutting department = (3/4) x $160000 = $120000

Assembly Department = (1/4) x $160000 = $40000

Personal Department cost will be allocated based on the ratio of number of employees used by the production departments.

Cutting Department : Assembly Department = 140 : 160 = 7 : 8

Personnel department overhead cost allocated to:

Cutting department = (7/15) x $300000 = $140000

Assembly Department = (8/15) x $300000 = $160000

B) Sequential Method:

First , personnel department cost will be allocated to the other three departments in the ratio of the employees used by those respective departments.

Maintenance : Cutting : Assembly = 10:140:160 = 1: 14:16

Maintenance = (1/31) x $300000 = $9677

Cutting = (14/31) * $300000 = $135484

Assembly = (15/31) * $300000 = $154839

Thereafter, the maintenance department cost will be allocated to the production departments in the ratio of the machine hours used by them that is in the ratio of:

Cutting Department : Assembly Department = 90000 hours : 30000 hours = 3 : 1

C) Reciprocal Method:

Let, M and P are the variables that represent the total costs to allocate from each of these service departments.

The equations that could be formed are:

M = 160000 + [10 / (10+140+160)]x P

= > 31M = 31x160000 + P

=> 31M = 4960000 + P ----------------------------(1)

P = 300000 + [10000 / (10000+90000+30000)]x M

=>13 P = 300000x13 + M

=> 13P = 3900000 + M-------------(2)

Solving (1) and (2) we get

13(31M – 4960000) = 3900000 + M

=> 402M = 3900000 + 64480000

=> M = $170100

From (1) we get,

P = 31 x 170100 – 4960000 = $313100

Maintenance Personnel Cutting Assembly Total Overhead costs prior to allocation $      1,60,000 $   3,00,000 $ 6,00,000 $   8,00,000 Personnel department cost apportioned $     -1,60,000 $ 1,20,000 $       40,000 maintenace department cost apportioned $ -3,00,000 $ 1,40,000 $   1,60,000 Total overhead cost after reallocation $ 8,60,000 $ 10,00,000 $ 18,60,000 Direct labour hours 40000 50000 90000 Predetermined overhead rate $         20.67

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