Question

Celestial Artistry Company is developing departmental overhead rates based on direct-labor hours for its two production Department. Etching and Finishing. The Etching, Department employs 20 people and the Finishing Department employs 80 people. Each person in these two departments works 2,000hours per year. The production-related overhead costs for the Etching Department are budgeted at $200.000, and the Finishing Department costs are budgeted at $320.000. Two service departments. Maintenance and Computing directly support the two production departments. These service department, have budgeted costs of $48,000 and $250,000 respectively. The production department’s overhead rates cannot be determined until the service department’s costs are allocated. The following schedule reflects the use of the Maintenance Departments and Computing Department’s output by the various departments.
Using Department
Service Department Maintenance Computing Etching Finishing
Maintenance(maintenance hours) 0 1,000 1,000 8,000
Computing (minutes) 240,000 0 840,000 120,000
Required:
1. Use the direct method to allocate service department costs. Calculate the overhead rates per direct labor hour for the Etching Department and the Finishing Department.
2. Use the step–down method to allocate service department costs. Allocate the Computing Department’s costs first. Calculate the overhead rates per direct-labor hour for the Etching Department and the Finishing Department.

Answer 1

Answer:

Celestial Artistry Company

1. Allocation of Service departments costs (direct method):

                                Service Dept             Production Dept.

                       Maintenance Computing  Etching     Finishing   Total

Overheads          $48,000   $250,000 $200,000 $320,000 $818,000

Maintenance       (48,000)                            5,333      42,667     0

Computing                            (250,000)    218,750      31,250     0

Total costs            $0            $0             $424,083 $393,917  $818,000

Direct labor hours                                      40,000   160,000

Overhead rate per direct labor hour       $10.602    $2.462

2. Allocation of Service departments costs (step-down method):

                                Service Dept             Production Dept.

                       Maintenance Computing  Etching     Finishing   Total

Overheads          $48,000   $250,000 $200,000 $320,000 $818,000

Computing            50,000    (250,000)    175,000     25,000     0

Maintenance       (98,000)           0             10,889         87,111     0

Total costs            $0            $0            $385,889     $432,111  $818,000

Direct labor hours                                     40,000     160,000

Overhead rate per direct labor hour       $9.647       $2.701

Explanation:

a) Data and Calculations:

                                                        Etching      Finishing          Total

Employees                                            20                 80              100

Direct labor hours per year            2,000           2,000

 (per employee)

Total direct labor hours/year       40,000       160,000         200,000

Production-related overhead $200,000    $320,000       $520,000

                                       Service Dept             Production Dept.

                               Maintenance Computing  Etching   Finishing   Total

Overheads                $48,000   $250,000 $200,000 $320,000 $818,000  

Maintenance

(maintenance hours)          0            1,000        1,000        8,000      10,000

Computing (minutes) 240,000               0    840,000   120,000 1,200,000

Direct Allocation of Service Departments Overheads:

Maintenance Overhead:

Etching = $5,333 ($48,000 * 1,000/9,000)

Finishing = $42,667 ($48,000 * 8,000/9,000)

Computing Overhead:

Etching = $218,750 ($250,000 * 840,000/960,000)

Finishing = $31,250 ($250,000 * 120,000/960,000)

Step-down Allocation of Service Departments Overheads

Computing Overhead:

Maintenance = $50,000 ($250,00 * 240,000/1,200,000)

Etching = $175,000 ($250,00 * 840,000/1,200,000)

Finishing = $25,000 ($250,00 * 120,000/1,200,000)

Maintenance Overhead of $98,000:

Etching = $10,889 ($98,000 * 1,000/9,000)

Finishing = $87,111 ($98,000 * 8,000/9,000)