Question

Direct Method and Overhead Rates Jasmine Company manufactures both pesticide and liquid fertilizer, with each product manufactured in separate departments. Three support departments support the production departments: Power, General Factory, and Purchasing. Budgeted data on the five departments are as follows:

Support Departments			Producing Departments
	Power	General Factory	Purchasing	Pesticide	Liquid Fertilizer
Overhead	$90,000	$312,000	$169,000	$78,500	$107,700
Square feet	1,500	—	1,500	4,200	4,800
Machine hours	—	1,403	1,345	24,000	8,000
Purchase orders	20	40	7	120	60

The company does not break overhead into fixed and variable components. The bases for allocation are power—machine hours; general factory—square feet; and purchasing—purchase orders.

Required:

1. Allocate the overhead costs to the producing departments using the direct method. If required, round your allocation ratios to four decimal places and round allocated costs to the nearest dollar and use the rounded values for the subsequent calculations.

Cost assignment:

	Pesticide	Liquid Fertilizer
Direct costs	$	$
Power
General Factory
Purchasing
Total	$	$

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

	Departmental overhead rates
Pesticide	$______ per machine hour
Liquid Fertilizer	$______ per machine hour

Answer 1

SOLUTION

(A) Allocation ratios-

	Pesticide	Liquid fertilizer
Square feet	4200/(4200+4800) = 0.4667	4800/(4200+4800) = 0.5333
Machine hours	24000/(24000+8000) = 0.7500	8000/(24000+8000) = 0.2500
Purchase orders	120/(120+60) = 0.6667	60/(120+60) = 0.3333

Cost assignment-

	Pesticide	Liquid fertilizer
Direct costs	78,500	107,700
Power
(0.7500*90,000),(0.2500*90,000)	67,500	22,500
General factory
(0.4667*312,000), (0.5333*312,000)	145,610	166,390
Purchasing
(0.6667*169,000), (0.3333*169,000)	112,672	56,328
Total	404,282	352,918

(B) Departmental overhead rates-

Pesticide- $404,282 / 24,000 = $17 per machine hour

Liquid fertilizer = $352,918 / 8,000 - $44 per machine hour