Support Department Cost Allocation Using the Step or Sequential Method The step

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Support Department Cost Allocation Using the Step or Sequential Method

The step or sequential method requires that support departments be ranked and that the highest ranking support department be allocated first to all lower ranking support departments and the producing departments. Then the highest ranking support department is closed and the second-highest ranking support department is allocated to lower ranking support departments and the producing departments. This continues until all support department cost has been allocated to the producing departments. The sequential method takes partial account of support department reciprocity. Reciprocity occurs when one support department uses the services of another support department. For example, Maintenance uses HR and HR may use the services of Maintenance. The sequential method does not take full account of reciprocity because lower ranking support department costs are never allocated to higher ranking support departments.

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 sequential method of support department cost allocation, and support departments are ranked in order of direct overhead cost (from high to low). Maintenance is allocated based on machine hours, HR on 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.

Calculate the allocation ratios to five significant digits and fill them into the following table (If an amount box does not require an entry, leave it blank or enter "0".) :

Using the allocation ratios, fill in the following table to allocate support department costs to the producing departments. (Round all allocated amounts to the nearest dollar. Leave cells blank that do not require an entry.)

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 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 18,000

Explanation / Answer

The support departments are ranked in the following order:

Rank 1- GF

Rank 2 - HR

Rank 3 - Maintenance

Allocation ratios are calculated as follows:

For GF:

Total Costs= 260,000

Square footage= 500+2,500+12,000+18,000= 33,000

Allocation Rate = 260,000/33,000 = 7.87879

Note: For calculating the allocation rate, we do not consider the respective support department's cost driver.

For HR:

Total Costs= 120,000+19,697 = 139,697

Direct Labour hours other than those of HR and GF = 44,000

Allocation rate for HR= 139,697/44,000 = 3.17493

For Maintenance

Total Costs= 80,000 + 3,939 + 12,700 = 96,639

Machine hours other than those of Maintenance= 12,000 + 3,000 = 15,000

Allocation rate for Maintenance = 96,639/15,000 = 6.44261

The Costs have been allocated to the departments as below using the allocation rates calculated:

Overhead rates for Fabricating and Assembly:

1. Fabricating = 297,006/ 12,000(Machine Hours) = 25 per machine hour

2. Assembly = 313,094/30,000(Direct Labour hours) = 10 per direct labour hour

Particulars Maintenance HR GF Fabricating Assembly Total Direct Overhead Cost 80,000 120,000 260,000 93,400 56,700 610,100 Machine Hours 1,000 3,000 5,000 12,000 3,000 Direct Labour Hours 4,000 5,000 8,000 10,000 30,000 Square footage 500 2,500 10,000 12,000 18,000 Allocation rate for GF 7.87879 GF Allocation 3,939 19,697 -260,000 94,545 141,818 Sub Total 83,939 139,697 0 187,945 198,518 Allocation rate for HR 3.17493 HR Allocation 12,700 -139,697 31,749 95,248 Sub total 96,639 0 0 219,695 293,766 Allocation rate for Maintenance 6.44261 Maintenance Allocation -96,639 77,311 19,328 Total 0 0 0 297,006 313,094 610,100

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