Publishing Company Question
The Publishing Company has three service departments and two operating departments.
Selected data from a recent period on the five departments is shown below.
Service department Operating
department
A B C 1 2 Total
Overhead costs €140,000 €105,000 €48,000 €275,000 €430,000 €998,000
Number of employees 60 35 140 315 210 760
Sq. feet of space 15,000 10,000 20,000 40,000 100,000 185,000
occupied
Hours of press time - - - 30,000 60,000 90,000
The company allocates service department costs by the step method in the following order: A
(number of employees), B (space occupied); and C (press hours). The company makes no
distinction between variable and fixed service department costs.
Required:
(A) Using the Step method, allocate the service department costs to the operating
departments.
(B) Assume the company allocates service department costs by the direct method, rather
than by the Step method. How much overhead cost would be allocated to each
operating department?
‘Production Company’ Question
The Production Company has budgeted costs in its departments as follows:
Factory Administration €270,000
Custodial Services €68,760
Personnel €28,840
Maintenance €45,200
Machining – overheads €376,300
Assembly – overheads €175,900
Total costs €965,000
The company allocates service department costs to other departments in the order listed in the
following table.
Department Number Total Sq feet of Direct Machine
of labour space labour hours
employees hours occupied hours
Factory Administration 12 - 5,000 - -
Custodial Services 4 3,000 2,000 - -
Personnel 5 5,000 3,000 - -
Maintenance 25 22,000 10,000 - -
Machining 40 30,000 70,000 20,000 70,000
Assembly 60 90,000 20,000 80,000 10,000
total 146 150,000 110,000 100,000 80,000
Machining and Assembly are operating departments; the other departments all act in a service
capacity. The company does not make a distinction between fixed and variable service
department costs. Factory Administration is allocated on the basis of total labour-hours;
Custodial Services on the basis of square feet occupied; Personnel on the basis of number of
employees; and Maintenance on the basis of machine hours.
Required:
(A) Allocate the service department costs to operating departments using the Step Method.
Then compute pre-determined overhead rates in the operating departments using a
machine hour basis in Machining and a direct labour hour basis in Assembly.
(B) Repeat Part (A) above, this time using the Direct Method. Again compute predetermined
overhead rates in Machining and Assembly.
(C) Assume ‘Production Company’ doesn’t want to bother with allocating service
department costs but simply wants to compute a single plant-wide overhead rate based
on total overhead costs (both service departments and operating departments) divided by
total direct labour hours. Compute the overhead rate.
(D) Suppose a job requires machine and labour time as follows:
Machine hours Direct labour hours
Machining department 190 25
Assembly department 10 75
Using the overhead rates computed in parts (A), (B) and (C) above, compute the amount
of overhead cost that would be assigned to the job if the overhead rates were developed
using (1) the step method; (2) the direct method; and (3) the plant-wide method.
