Question

Direct Method and Overhead Rates

Jasmine Company manufactures both pesticide and liquid fertilizer, with each product manufactured in separate departments. Three support departments support the production departments: Power, General Factory, and Purchasing. Budgeted data on the five departments are as follows:

The company does not break overhead into fixed and variable components. The bases for allocation are power—machine hours; general factory—square feet; and purchasing—purchase orders.

Required:

1. Allocate the overhead costs to the producing departments using the direct method. (Take allocation ratios out to four significant digits. Round allocated costs to the nearest dollar.)

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2. Using machine hours, compute departmental overhead rates. (Round the overhead rates to the nearest cent.)

Answer 1

Direct Allocation Method:

Direct allocation method is one of the allocation methods which allocate the overhead costs of service departments to the production department which indicates that no allocation is made between two service departments.

1.

Compute the allocation ratios for distributing the overhead cost to production departments as given below:

Compute the allocation ratios for distributing the overhead cost to production departments using spreadsheet formulas as given below:

Allocate the overhead cost of company J production departments using direct method.

Allocate the overhead cost of company J production departments using direct method as given below:

2.

Compute departmental overhead rate using machine hours as given below:

Pesticide:

Liquid fertilizer:

Thus, departmental overhead rate of pesticide and liquid fertilizer is $16.85 and $44.18 per machine hour.