Glass Creations Company is developing departmental overhead rates based on direc

Question

Glass Creations Company is developing departmental overhead rates based on direct-labor hours for its two production departments, Etching and Finishing. The Etching Department employs 25 people and the Finishing Department employs 75 people. Each person in these two departments works 1,700 hours per year. The production-related overhead costs for the Etching Department are budgeted at $170,000, and the Finishing Department costs are budgeted at $290,000. Two service departments, Maintenance and Computing, directly support the two production departments. These service departments have budgeted costs of $47,740 and $315,000, respectively. The production departments' overhead rates cannot be determined until the service departments' costs are allocated. The following schedule reflects the use of the Maintenance Department's and Computing Department's output by the various departments. Required: 1. Use the reciprocal-services method to allocate service department costs. Calculate the overhead rates per direct-labor hour for the Etching Department and the Finishing Department.

Explanation / Answer

Total direct labor hours = 100 x 1,700 = 170,000 hours

1. Allocation of service department costs using reciprocal services method:

Maintenance Computing Etching Finishing Traceable costs 47,740 315,000 170,000 290,000 Allocation of maintenance department costs (47,740) 4,774 4,774 38,192 Allocation of maintenance department costs (319,774) 279,802 39,972 Total service department costs allocated 47,740 319,774 Overhead costs traceable to production departments 284,576 78,164 Total overhead cost 454,576 368,164 Direct labor hours 42,500 127,500 Overhead rate per hour $ 10.70 $ 2.89

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