Question

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

Stevenson Company is divided into two operating divisions: Battery and Small Motors. The company allocates power and general factory costs to each operating division using the direct method. Power costs are allocated on the basis of the number of machine hours and general factory costs on the basis of square footage. Support department cost allocations using the direct method are based on the following data:

	Support Departments				Operating Divisions
	Power		General Factory		Battery		Small Motors
Overhead costs	$160,000		$430,000		$163,000		$84,600
Machine hours	2,000		2,000		8,000		2,000
Square footage	1,000		1,500		5,000		17,500
Direct labor hours					18,000		60,000

Required:

1. Calculate the allocation ratios for Power and General Factory. (Note: Carry these calculations out to four decimal places, if necessary.)

	Power	General Factory
Battery
Small Motors

2. Allocate the support service costs to the operating divisions. Round all amounts to the nearest dollar. Use a minus sign to indicate a subtraction. For those boxes in which no entry is required, leave the box blank or enter zero ("0").

Support Departments

Operating Divisions

Power

General Factory

Battery

Small Motors

Direct costs

$

$

$

$

Allocate:

Power

General Factory

Total

$

$

$

$

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. Round your answers to the nearest cent.

Battery overhead rate	$
Small Motors overhead rate	$

Answer 1

Answer

• Requirement 1

	Power [8000 + 2000 = 10000 machine hours]	General factory [5000 + 17500 = 22500 sq feet]
Battery	0.8000	0.2222
Small Motors	0.2000	0.7778

--Workings

	Power [8000 + 2000 = 10000 machine hours]	General factory [5000 + 17500 = 22500 sq feet]
Battery	=8000/10000	=5000/22500
Small Motors	=2000/10000	=17500/22500

• Requirement 2

	Power	General Factory	Battery	Small Motors
Direct Cost	$160,000	$430,000	$163,000	$84,600
Allocate:
Power	($160,000)	$0	$128,000	$32,000
General factory		($430,000)	$95,546	$334,454
Total	$0	$0	$386,546	$451,054

--Working

	Power	General Factory	Battery	Small Motors
Direct Cost	160000	430000	163000	84600
Allocate:
Power	-160000	0	=160000*0.8	=160000*0.2
General factory		-430000	=430000*0.2222	=430000*0.7778

• Requirement 3

	Total Overhead after allocation	Tota Direct Labor hours	Overhead rates = Answer
Battery	$386,546	18,000	$                                21.47
Small Motors	$451,054	60,000	$                                  7.52