Question

Rowe Industries Ltd operates a manufacturing plant with three production departments: Machining, Assembly and Finishing, and three service departments: Canteen, Store and Engineering Shop, as shown in Table 1.

TABLE 1: DETAILS OF PRODUCTION AND SERVICE DEPARTMENTS

Details	Machining	Assembly	Finishing	Store	Canteen	Engineering Shop
Allocated Overhead	$586 000	$418 000	$322 000	$118 000	$115 000	$158 000
Number of Employees	40	75	60	10	–	15
Number of Orders	100	80	125	–	–	55
Service Hours	1500	1 000	800	–	–	–

The company allocates service departments’ costs as follows:

• Store – based on number of orders

• Canteen – based on number of employees

• The canteen employees are subcontractors

• Engineering Shop – based on service hours

• Rowe Industries Ltd uses the step down method to allocate service department costs.

• Calculate the amount of overhead cost that will be assigned to EACH production department.

Answer 1

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Note: Under step down method the support department which provides services to other service department is allocated first. So, here Canteen department provides service to both Stores and Canteen Engineering department and to production department as well. So cost of Canteen department is allocated first among all other departments. Then Stores department provides services to engineering department and to production department as well. So cost of Store department is allocated among remaining departments. At last Engineering department provides services to only production department so its cost is allocated to production department only.

Rowe Industries Ltd
Step Down Method	Store	Canteen	Engineering	Machining	Assembly	Finishing	Total
No. of employees	10.00	-	15.00	40.00	75.00	60.00	200.00
Number of Orders	-	-	55.00	100.00	180.00	125.00	460.00
Service Hours	-	-	-	1,500.00	1,000.00	1,800.00	4,300.00
Allocated Overhead	118,000.00	115,000.00	158,000.00	586,000.00	418,000.00	322,000.00	1,717,000.00
Allocation of Canteen cost	5,750.00	(115,000.00)	8,625.00	23,000.00	43,125.00	34,500.00	-
In the ratio of No. of employees (10:15:40:75:60)
Total costs after allocation of Canteen cost	123,750.00	-	166,625.00	609,000.00	461,125.00	356,500.00	1,717,000.00
Allocation of Store cost	(123,750.00)	-	14,796.20	26,902.17	48,423.91	33,627.72	-
In the ratio of No. of orders (55:100:180:125)
Total costs after allocation of Stores cost	-	-	181,421.20	635,902.17	509,548.91	390,127.72	1,717,000.00
Allocation of Engineering cost	-	-	(181,421.20)	63,286.46	42,190.98	75,943.76	-
In the ratio of Service Hours (1500:1000:1800)
Total allocated	-	-	-	699,188.64	551,739.89	466,071.47	1,717,000.00