Question

Celestial Artistry Company is developing departmental overhead rates based on direct-labor hours for its two production Department. Etching and Finishing. The Etching, Department employs 20 people and the Finishing Department employs 80 people. Each person in these two departments works 2,000hours per year. The production-related overhead costs for the Etching Department are budgeted at $200.000, and the Finishing Department costs are budgeted at $320.000. Two service departments. Maintenance and Computing directly support the two production departments. These service department, have budgeted costs of $48,000 and $250,000 respectively. The production department’s overhead rates cannot be determined until the service department’s costs are allocated. The following schedule reflects the use of the Maintenance Departments and Computing Department’s output by the various departments.

Using Department
Service Department Maintenance Computing Etching Finishing
Maintenance(maintenance hours) 0 1,000 1,000 8,000
Computing (minutes) 240,000 0 840,000 120,000
Required:
1. Use the direct method to allocate service department costs. Calculate the overhead rates per direct labor hour for the Etching Department and the Finishing Department.
2. Use the step–down method to allocate service department costs. Allocate the Computing Department’s costs first. Calculate the overhead rates per direct-labor hour for the Etching Department and the Finishing Department.

Answer 1

Celestial Artistry Company

1. Allocation of Service departments costs (direct method):

Service Dept Production Dept.

Maintenance Computing Etching Finishing Total

Overheads $48,000 $250,000 $200,000 $320,000 $818,000

Maintenance (48,000) 5,333 42,667 0

Computing (250,000) 218,750 31,250 0

Total costs $0 $0 $424,083 $393,917 $818,000

Direct labor hours 40,000 160,000

Overhead rate per direct labor hour $10.602 $2.462

2. Allocation of Service departments costs (step-down method):

Service Dept Production Dept.

Maintenance Computing Etching Finishing Total

Overheads $48,000 $250,000 $200,000 $320,000 $818,000

Computing 50,000 (250,000) 175,000 25,000 0

Maintenance (98,000) 0 10,889 87,111 0

Total costs $0 $0 $385,889 $432,111 $818,000

Direct labor hours 40,000 160,000

Overhead rate per direct labor hour $9.647 $2.701

Step-by-step explanation:

a) Data and Calculations:

Etching Finishing Total

Employees 20 80 100

Direct labor hours per year 2,000 2,000

(per employee)

Total direct labor hours/year 40,000 160,000 200,000

Production-related overhead $200,000 $320,000 $520,000

Service Dept Production Dept.

Maintenance Computing Etching Finishing Total

Overheads $48,000 $250,000 $200,000 $320,000 $818,000

Maintenance

(maintenance hours) 0 1,000 1,000 8,000 10,000

Computing (minutes) 240,000 0 840,000 120,000 1,200,000

Direct Allocation of Service Departments Overheads:

Maintenance Overhead:

Etching = $5,333 ($48,000 * 1,000/9,000)

Finishing = $42,667 ($48,000 * 8,000/9,000)

Computing Overhead:

Etching = $218,750 ($250,000 * 840,000/960,000)

Finishing = $31,250 ($250,000 * 120,000/960,000)

Step-down Allocation of Service Departments Overheads

Computing Overhead:

Maintenance = $50,000 ($250,00 * 240,000/1,200,000)

Etching = $175,000 ($250,00 * 840,000/1,200,000)

Finishing = $25,000 ($250,00 * 120,000/1,200,000)

Maintenance Overhead of $98,000:

Etching = $10,889 ($98,000 * 1,000/9,000)

Finishing = $87,111 ($98,000 * 8,000/9,000)