Skill Building Exercise 3-Period Cost Application Analysis- Direct Method The ma

Question

Skill Building Exercise 3-Period Cost Application Analysis- Direct Method The managers of Sample Company are discussing ways to allocate the cost of service departments, such as quality control and maintenance, to the production departments. To aid them in this discussion, the controller has provided the following information: Quality Control Maintenance Machining AssemblyTotal $1,250,000 50,000 25,00025,000 $200,000S400,000 50,000 $300,000 Budgeted O/H before Allocation$350,000 Budgeted machine hours Budgeted direct labour hours Budgeted hours of service Quality control Maintenance 7,000 21,000 7,00035,000 18,00012,00040,000 10,000 Using the direct allocation method, the total amount of overhead allocated to each machine hour a) S9.35 b) S5.25 c) $2.40 d) $8.00 e) $15.65 would be: 13

Explanation / Answer

Answer: Option e) $15.65

Overhead allocated to each machine hour = $782500 / 50000 = $15.65

Direct Method Service Departments Production Departments Quality Control Maintenance Machining Assembly Total Budgeted O/H before interdepartment cost allocations 350000 200000 400000 300000 1250000 Allocation of Quality Control costs -350000 0 262500 87500 0 Allocation of Maintenance costs 0 -200000 120000 80000 0 Budgeted O/H after interdepartment cost allocations $ 0 0 782500 467500 1250000

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