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	$460,000	$170,000	$42,000	$77,000
Square footage	—	2,200	4,400	4,400
Number of receiving orders	310	—	1,900	1,100
Direct labor hours	—	—	28,000	43,000

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	4400/8800 = 0.50	4400/8800 = 0.50
Number of receiving orders	1900/3000 = 0.6333	1100/3000 = 0.3667

Calculate allocation Cost :

	Assembly	Finishing
general factory	230000	230000
Receiving	107661	62339
Direct cost	42000	77000
Total Cost	379661	369339

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

Overhead Rate

Assembly = 379661/28000 = $13.56 per labour hour

Finishing = 369339/43000 = $8.59 per labour hour