Concept explainers
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. 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. Using the direct method, rework requirement 1.
- 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 |
- 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.
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Chapter 15 Solutions
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Additional Business Textbook Solutions
Financial Accounting, Student Value Edition (4th Edition)
Horngren's Accounting (11th Edition)
Intermediate Accounting
Horngren's Financial & Managerial Accounting, The Financial Chapters (Book & Access Card)
Horngren's Financial & Managerial Accounting, The Managerial Chapters (6th Edition)
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