Question

Celestial Artistry Company is developing departmental overhead rates based on direct-labor hours for its two production departments, Etching and Finishing. The Etching Department employs 20 people and the Finishing Department employs 80 people. Each person in these two departments works 2,000 hours 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 departments have budgeted costs of $48,000 and $250,000, respectively. The production departments’ overhead rates cannot be determined until the service departments’ costs are allocated. The following schedule reflects the use of the Maintenance Department’s 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. 1-a. Use the direct method to allocate service department costs.
2. 1-b. Calculate the overhead rates per direct-labor hour for the Etching Department and the Finishing Department.

Answer 1

1a.

	Maintenance	Computing	Etching	Finishing
Direct costs	$48,000	$250,000	$200,000	$320,000
Allocation:
Maintenace costs	-48,000	0	5,333 (48,000/9,000 *1,000)	42,667 (48,000/9,000 *8,000)
Computing cost		-250,000	218,750 (250,000/960 * 840)	31,250 (250,000/960 * 120)
Total	$0	$0	$424,083	$393,917

1b.

Overhead rate per direct labor hour:

Etching = $424,083 / 40,000(20*2,000) = $10.60 per direct labor hour

Finishing = $393,917 / 160,000(80*2,000) = $2.462 per direct labor hour