Question

# Direct Method and Overhead Rates Jasmine Company manufactures both pesticide and liquid fertilizer, with each product...

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

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

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

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

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