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 $440,000 $190,000 $40,000 $80,000
Square footage — 2,500 5,000 5,000
Number of receiving orders 360 — 2,000 1,250
Direct labor hours — — 20,000 49,000

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

Calculation allocation ratio :

	Assembly	Finishing
Square footage	5000/10000 = 50%	5000/10000 = 50%
Number of receiving orders	2000/3250 = 0.6154	1250/3250 = 0.3846

Calculate allocation Cost :

	Assembly	Finishing
general factory	220000	220000
Receiving	116926	73074
Direct cost	40000	80000
Total Cost	376926	373074

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

Overhead Rate

Assembly = 376926/20000 = 18.85 per labour hour

Finishing = 373074/49000 = 7.61 per labour hour