CASE4B–6
Step-Down Method versus Direct Method; Predetermined Overhead Rates [LO10, LO11]
CASE4B–6
Petah, Ltd., of Tel Aviv, Israel, has budgeted costs in its various departments
as follows for the coming year:
Factory Administration . . . . .
. . . . . . . . . . 540,000
Custodial Services . . . . . . .
. . . . . . . . . . . 137,520
Personnel . . . . . . . . . . . .
. . . . . . . . . . . . . 57,680
Maintenance. . . . . . . . . . .
. . . . . . . . . . . . 90,400
Stamping—overhead . . . . . . . .
. . . . . . . . 752,600
Assembly—overhead . . . . . . . .
. . . . . . . . 351,800
Total overhead cost . . . . . . .
. . . . . . . . . . . 1,930,000
The
Israeli currency is the shekel, denoted by. The company allocates service department costs to
other departments, in the order listed below.
|
|
Number
of Employees
|
Total
Labor
Hours
|
Square
Meters of
Space Occupied
|
Direct
Labor-
Hours
|
Machine-
Hours
|
|
Factory
Administration
|
22
|
—
|
5,000
|
—
|
—
|
|
Custodial
Services
|
8
|
6,000
|
2,000
|
—
|
—
|
|
Personnel
|
10
|
10,000
|
3,000
|
—
|
—
|
|
Maintenance
|
50
|
44,000
|
10,000
|
—
|
—
|
|
Stamping—overhead
|
80
|
60,000
|
70,000
|
40,000
|
140,000
|
|
Assembly—overhead
|
120
|
180,000
|
20,000
|
160,000
|
20,000
|
|
|
290
|
300,000
|
110,000
|
200,000
|
160,000
|
Stamping
and Assembly are operating departments; the other departments are service
departments. Factory Administration is allocated on the basis of labor-hours;
Custodial Services on the basis of square meters occupied; Personnel on the
basis of number of employees; and Maintenance on the basis of machine-hours.
Required:
1.
Allocate service department costs to consuming departments by the step-down
method. Then compute predetermined overhead rates in the operating departments,
using a machine-hours basis in Stamping and a direct labor-hours basis in
Assembly.
2.
Repeat (1) above, this time using the direct method. Again, compute
predetermined overhead rates in Stamping and Assembly.
3.
Assume that the company doesn’t bother with allocating service department costs
but simply computes a single plantwide overhead rate based on total overhead
costs (both service department and operating department costs) divided by total
direct labor-hours. Compute the plantwide overhead rate.
4.
Suppose a job requires machine and labor time as follows:
Machine-Hours
Direct Labor-Hours
Stamping Department . . . . . . .
. 190 25
Assembly Department . . . . . . .
. 10 75
Total hours . . . . . . . . . . .
. . . . . . 200 100
Using
the overhead rates computed in (1), (2), and (3) above, compute the amount of
overhead cost that would be assigned to the job if the overhead rates were
developed using the stepdown method, the direct method, and the plant wide
method. (Round allocations to the nearest whole shekel.)
File name: CASE4B–6 Petah.xls File type: xls PRICE: $12
