Support Department Cost Allocation Using the Direct Method Factory accountants u
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Support Department Cost Allocation Using the Direct Method
Factory accountants usually allocate support department costs to the producing departments using one of three methods: the direct method, the sequential (or step) method, or the algebraic (or reciprocal) method. The objective is simple - to get all factory costs into the producing departments in order to calculate overhead rates and apply them to units produced. Why can't support departments allocate overhead costs to units produced?
Support departments don't make the product that the company is in business to produce and sell - only producing departments do that.
The direct method involves allocating overhead cost from the support departments to the producing departments. The direct method never allocates cost from one support department to another support department. As a result, it is the easiest of the three methods.
Let's use Porter Company, as an example. Porter has two producing departments - Fabricating and Assembly - and three support departments - Maintenance, Human Resources (HR) and General Factory (GF). Porter provided the following information on the five departments:
Porter uses the direct method of support department cost allocation. Maintenance is allocated based on machine hours, HR on the basis of direct labor hours, and GF on the basis of square footage. The Fabricating overhead rate is based on machine hours and the Assembly overhead rate is based on direct labor hours.
Fill in the following table to allocate support department costs to the producing departments. (Round all allocation ratios to four significant digits and all allocated amounts to the nearest dollar. If an amount box does not require an entry, leave it blank or enter "0".)
Notice that after allocation, zero dollars remain in the support departments and all overhead cost has been allocated to the producing departments. As a check on your work, add up all direct overhead costs from the first line - it equals $610,100. Then add the totals after allocation - again, it equals $610,100.
Finally, calculate the overhead rates (rounded to the nearest cent) for Fabricating and Assembly.
Fabricating overhead rate $ per machine hour
Assembly overhead rate $ per direct labor hour
Maintenance HR GF Fabricating Assembly Direct overhead cost $80,000 $120,000 $260,000 $93,400 $56,700 Machine hours 1,000 3,000 5,000 12,000 3,000 Direct labor hours 4,000 5,000 8,000 10,000 30,000 Square footage 500 2,500 10,000 12,000 18,000Explanation / Answer
Statement of Allocation of Overhead Under Direct Method Maintenance HR GF Fabricating Assembly Direct Overhead Cost 80,000.00 120,000.00 260,000.00 93,400.00 56,700.00 Allocate: Maintenance (80,000.00) 10,434.78 17,391.30 41,739.13 10,434.78 HR (130,434.78) 21,739.13 27,173.91 81,521.74 GF (299,130.43) 119,652.17 179,478.26 Total after allocation - 0.00 0.00 281,965.21 328,134.78 Allocation of Maintenance Cost: HR - $80,000 X 3,000/23,000 10,434.78 GF - $80,000 X 5,000/23,000 17,391.30 Fabricating - $80,000 X 12,000/23,000 41,739.13 Assembly - $80,000 X 3,000/23,000 10,434.78 Allocation of HR Cost: GF - $130,434.78 X 8,000/48,000 21,739.13 Fabricating - $130,434.78 X 10,000/48,000 27,173.91 Assembly - $130,434.78 X 30,000/48,000 81,521.74 Allocation of GF Cost: Fabricating - $299,130.43 X 12,000/30,000 119,652.17 Assembly - $299,130.43 X 18,000/30,000 179,478.26 Ovrehead Rate: Fabricating Overhead Rate = $281,965.21 / 12,000 Mach hrs Fabricating Overhead Rate = $23.50 per mach hr. (Approx.) Assembly Overhead Rate = $328,134.78 / 30,000 Lab. Hrs Assembly Overhead Rate = $10.94 per direct labor hour (Approx.)
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