Question

Direct Method

Eilers Company has two producing departments and two support departments. The following budgeted data pertain to these four departments:

	Support Departments		Producing Departments
	General Factory	Receiving	Assembly	Finishing
Direct overhead	$420,000	$170,000	$45,000	$79,000
Square footage	—	2,800	5,600	5,600
Number of receiving orders	390	—	1,850	1,200
Direct labor hours	—	—	21,000	47,000

The company has decided to simplify its method of allocating support service costs by switching to the direct method.

Required:

1. Allocate the costs of the support departments to the producing departments using the direct method. Round allocation ratios to four significant digits. Round allocated costs to the nearest dollar. Use the rounded values for subsequent calculations.

Allocation ratios:

	Assembly	Finishing
Square footage
Number of receiving orders
Allocations:
	Assembly	Finishing
General Factory	$	$
Receiving
Direct costs
Total	$	$

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

	Overhead Rate
Assembly	per direct labor hour
Finishing	per direct labor hour

Answer 1

1
Allocation ratios:
	Assembly	Finishing
Square footage	0.5	0.5
Number of receiving orders	0.6066	0.3934
Allocation:
	Assembly	Finishing
General Factory	210000	210000
Receiving	103122	66878
Direct costs	45000	79000
Total	358122	355878
2
	Overhead Rate
Assembly	17.05	per direct labor hour	=358122/21000
Finishing	7.57	per direct labor hour	=355878/47000

Workings:
Allocation ratios:
	Assembly	Finishing
Square footage	=5600/(5600+5600)	=5600/(5600+5600)
Number of receiving orders	=1850/(1850+1200)	=1200/(1850+1200)
Allocation:
	Assembly	Finishing
General Factory	=420000*0.5	=420000*0.5
Receiving	=170000*0.6066	=170000*0.3934