Chapter 4.B, Problem 6P

PROBLEM 4B-6 Step-Down Method versus Direct Method; Predetermined Overhead Rates LO4-10, LO4-11 This Sendai Co., Ltd., of Japan has budgeted costs in its various departments as follows for the coming year.

Factory Administration	$270,000
Custodial Services	68,760
Personnel	28,840
Maintenance	45,200
Machining-overhead	376,300
Assembly-overhead	175.900
Total cost	$955,000

The company allocates service department costs to other departments in the order listed below.

Square

Department	Number of Employees	Total Labor- Hours	Feet of Space Occupied	Direct Labor- Hours	Machine- Hours
Factory Administration ...	... 12	-	5,000	-	-
Custodial Services	... 4	3,000	2,000	-	-
Personnel	... 5	5,000	3,000	-	-
Maintenance	... 25	22,000	10,000	-	-
Machining	... 40	30,000	70,000	20,000	70,000
Assembly	... 60	90,000	20,000	80,000	10,000
	146	150.000	110,000	100,000	80,000

Machining and Assembly are operating departments: the other departments are service departments. Factory Administration is allocated based on labor-hours: Custodial Services based on square feet occupied: Personnel based on number of employees: and Maintenance based on machine-hours.

Required:

1. Allocated services department costs to consuming departments by the step-down method. Then compute predetermined overhead rates in the operating departments using machine-hours as the allocated base in Machining and direct labor-hours as the allocation base in Assembly.
2. Repeat (1) above, this time using the direct method. Again compute predetermined overhead rates in Machining and Assembly.
3. Assume that the company doesn’t bother with allocating service department costs but simply computers a single plantwide overhead rate that divides the total overhead costs (both service department and operating costs) by the total direct labor-hours. Compute the plantwide overhead rate.
4. Suppose a job requires machine and labor time as follows:

	Machine-Hours	Direct Labour-Hours
Machine Department	190	25
Assembly Department	10	75
Total hours	200	100

Using the overhead rates computed in (l). (I), and (3) above, compute the amount of overhead cost that would be assigned to the job if the overhead rates were developed using the step-down method, the direct method, and the plantwide method.