Chapter 4, Problem 52E

(Appendix 4B) Sequential Method of Support Department Cost Allocation

Refer to Exercise 4-51 for data. Now assume that Stevenson uses the sequential method to allocate support department costs to the operating divisions. General Factory is allocated first in the sequential method for the company.

Required:

1. 1. Calculate the allocation ratios for Power and General Factory. (Note: Carry these calculations out to four decimal places.)
2. 2. Allocate the support service costs to the operating divisions. (Note: Round all amounts to the nearest dollar.)
3. 3. Assume divisional overhead rates are based on direct labor hours. Calculate the overhead rate for the Battery Division and for the Small Motors Division. (Note: Round overhead rates to the nearest cent.)

To determine

Computeallocation ratios for power and general factory under the sequential method.

Explanation of Solution

Sequential Method:

Sequential method recognizes that there is possible interaction between the support departments. However, it does notaccount for such interaction in full which makes it more accurate as compared to the direct method.

Use the following formula to calculate allocation ratios for general factory on the basis of number of square footage:

Power:

$\mathrm{Power}=\frac{\mathrm{Number}of\mathrm{square}footage\text{}in\mathrm{power}}{\mathrm{Total}\mathrm{square}footage}$

Substitute 1,000 for number of square footage in power and 21,000 for total square footage in the above formula.

$\begin{array}{c}\mathrm{Power}=\frac{1,000\mathrm{square}footage}{21,000\mathrm{square}footage}\\ =0.0476\end{array}$

Therefore, the cost assignment ratio for S2 is 0.0476.

Battery:

$\mathrm{Battery}=\frac{\mathrm{Number}of\mathrm{square}footage\text{}in\mathrm{battery}}{\mathrm{Total}\mathrm{square}footage}$

Substitute 5,000 for number ofsquare footage in battery and 21,000 for total square footage in the above formula.

$\begin{array}{c}\mathrm{Battery}=\frac{5,000\mathrm{square}footage}{21,000\mathrm{square}footage}\\ =0.2381\end{array}$

Therefore, the cost assignment ratio for battery is 0.2381.

Small motors:

$\mathrm{Small}motors=\frac{\mathrm{Number}of\mathrm{square}footage\text{}in\mathrm{small}motors}{\mathrm{Total}\mathrm{square}footage\text{}}$

Substitute 15,000 for number ofsquare footage in small motors and 21,000 for total square footage in the above formula.

$\begin{array}{c}\mathrm{Small}motors=\frac{15,000\mathrm{square}footage}{21,000\text{}\mathrm{square}footage}\\ =0.7143\end{array}$

Therefore, the cost assignment ratio for painting department is 0.7143.

Use the following formula to calculate cost assignment ratios for power on the basis of number of machine hours:

Battery:

$\mathrm{Battery}=\frac{\mathrm{Number}of\mathrm{machine}hours\mathrm{of}\mathrm{battery}}{\mathrm{Total}\mathrm{machine}hours\mathrm{of}\mathrm{operating}departments}$

Substitute 7,000 for number of machine hoursofbattery and 8,000 for total machine hours ofoperating department in the above formula.

$\begin{array}{c}\mathrm{Battery}=\frac{7,000hours}{8,000hours}\\ =0.8750\end{array}$

Therefore, the assignment ratio for assembly department is 0.8750.

Small motors:

$\mathrm{Small}motors=\frac{\mathrm{Number}of\mathrm{machine}hours\mathrm{of}\mathrm{small}motors}{\mathrm{Total}\mathrm{machine}hours\mathrm{of}\mathrm{operating}departments}$

Substitute 1,000 for number of machine hours of painting and 8,000 for total machine hours of operating department in the above formula.

$\begin{array}{c}\mathrm{Painting}=\frac{1,000hours}{8,000hours}\\ =0.1250\end{array}$

Therefore, the assignment ratio for painting department is 0.1250.

To determine

Apportion the support service costs to the operating divisions by using the sequential method:

Explanation of Solution

Allocation:

Allocation can be defined as the process of assigning the indirect costs to the cost object with the help of a convenient and reasonable method. It is essential to allocate indirect costs to the cost objects.

	Support departments		Operating departments
	Power($)	General factory($)	Battery($)	Small motors($)
Direct costs	160,000	430,000	163,000	84,600
Allocate:
Power	20,468	(430,000)	102,383	307,149
General factory	(180,468)		157,910	22,559
Total	0	0	423,293	414,308

Table (1)

Working Note:

#. Allocation of support service costs to power:

$\begin{array}{c}\mathrm{Allocation}\cos t=\mathrm{General}factory\cos t\times \mathrm{Power}ratioof\mathrm{general}factory\\ =\$430,000\times 0.0476\\ =\$20,468\end{array}$

1. Allocation of support servicecost to battery:

For power cost:

$\begin{array}{c}\mathrm{Allocation}\cos t=\mathrm{Power}\cos t\times \mathrm{Battery}ratioof\mathrm{power}\\ =\$430,000\times 0.2381\\ =\$102,283\end{array}$

For general factory cost:

$\begin{array}{c}\mathrm{Allocation}\cos t=\mathrm{General}factory\cos t\times \mathrm{Battery}ratioof\mathrm{general}factory\\ =\$180,468\times 0.8750\\ =\$157,910\end{array}$

2. Allocation of support service cost to small motors:

For power cost:

$\begin{array}{c}\mathrm{Allocation}\cos t=\mathrm{Power}\cos t\times \mathrm{Small}motorsratioof\mathrm{power}\\ =\$430,000\times 0.7143\\ =\$307,149\end{array}$

For general factory cost:

$\begin{array}{c}\mathrm{Allocation}\cos t=\mathrm{General}factory\cos t\times \mathrm{General}factoryratioof\mathrm{general}factory\\ =\$180,468\times 0.1250\\ =\$22,559\end{array}$

To determine

Compute overhead rate of battery and small motors divisions.

Answer to Problem 52E

The overhead rate of battery and small motors divisions is $23.52 and $6.91 respectively.

Explanation of Solution

Overhead Rate:

The amount which is calculate at the beginning of the accounting year for a related activity by dividing the total estimated annual overhead by estimated annual activity level is known as the overhead rate.

Use the following formula to calculate overhead rate for battery division:

$\mathrm{Overhead}rate=\frac{Estimatedannualoverhead}{Estimatedannualactivitylevel}$

Substitute $423,293 for estimated annual overhead and 18,000 DLH for estimated annual activity level in the above formula.

$\begin{array}{c}\mathrm{Overhead}rate=\frac{\$423,293}{18,000\mathrm{DLH}}\\ =\$23.52\end{array}$

Therefore, overhead rate is $23.52.

Use the following formula to calculate overhead rate for small motors division:

$\mathrm{Overhead}rate=\frac{Estimatedannualoverhead}{Estimatedannualactivitylevel}$

Substitute $414,308 for estimated annual overhead and 60,000 DLH for estimated annual activity level in the above formula.

$\begin{array}{c}\mathrm{Overhead}rate=\frac{\$414,308}{60,000\mathrm{DLH}}\\ =\$6.91\end{array}$

Therefore, overhead rate is $6.91.