Chapter 15, Problem 15.30P

Allocating costs of support departments; step-down and direct methods. The Eastern Summit Company has prepared department overhead budgets for budgeted-volume levels before allocations as follows:

Support departments:
Building and grounds	$45,000
Personnel	7,800
General plant administration	36,120
Cafeteria: operating loss	20,670
Storeroom	18,300	$127,890
Operating departments:
Machining	536,000
Assembly	60,000	96,000
Total for support and operating departments		$223,890

Management has decided that the most appropriate inventory costs are achieved by using individual-department overhead rates. These rates are developed after support-department costs are allocated to operating departments.

Bases for allocation are to be selected from the following:

1. 1. Using the step-down method, allocate support-department costs. Develop overhead rates per direct manufacturing labor-hour for machining and assembly. Allocate the costs of the support departments in the order given in this problem. Use the allocation base for each support department you think is most appropriate.
2. 2. Using the direct method, rework requirement 1.
3. 3. Based on the following information about two jobs, determine the total overhead costs for each job by using rates developed in (a) requirement 1 and (b) requirement 2.

	Direct Manufacturing Labor-Hours
	Machining	Assembly
Job 88	18	8
Job 89	10	20

1. 4. The company evaluates the performance of the operating department managers on the basis of how well they managed their total costs, including allocated costs. As the manager of the Machining Department, which allocation method would you prefer from the results obtained in requirements 1 and 2? Explain.