SLNHYWLYVddd NOLLDNGOUdd OL NOLLVOOTIV GVdHYHAO yy] IdoCOST AND PRICE MANAGEMENT- Rocio Vega TUTORIAL ABOUT OVERHEAD ALLOCATION METHODS.- SECONDARY ALLOCATION ‘THE TRANSFER OF OVERHEAD FROM SERVICE TO PRODUCTION DEPARTMENTS Acertain company has 2 service departments: IT (Information Technology) and Staff and 2 production departments: Trimming and Assemble. Both production departments already prepared their overhead budget for next year which are shown with the letters OB (Overhead budget) Service departements transfer their budgeted overhead to production departments using the following basis: IT uses the number of services requested and Staff uses the number of employees. Required: Prepare the secondary allocation of overhead (service departments to production departments) and determine the amount of overhead costs for every production department assuming: A) Direct Method B) Sequential Method SOLUTION A)DIRECT METHOD: —_The service departments only transfer their budgeted overhead to production departments. Service departments never transfer their budgeted overhead to other service departments Percentages are obtained using the basis selected by every service department. Example: The basis selected by IT was the number of services. As we are using the Direct Method, the budgeted overhead is goint to be transfered only to the production departments: Trimming and Assemble. Therefore, the total sum of the number of services will be 100%. The number of services requested by Staff will not be considered to determine the 100% because we are Using the Direct Method and service departments are not considered. So, if Trimming has 1500 services and Assemble 200, 700 services is 100%. From there, the Three Rule (proportion) is applied to obtain the percentage for every production department. This % is ‘multiplied by $50,000 which is the amount of budgeted overhead that IT wants to transfer And that's it! The same procedure for Staff, the only difference will be thatthe basis used to calculate the percentages will be now the number of employees. DIRECT METHOD. TF Staff Trimming) ‘Assemble TOTAL Budgeted overhead $50,000 $100,000 ‘$350,000 $500,000 '$4,000,000 IT Allocation $50,000 # Services 300 500 200 700 % Not considered SIT ar 1A% 28.6% 100.0% $36,714 $14,286 $60,000 Staff Allocation $100,000 # Employees 20 100 50. 150 % Not considered 10/18 55 66.7% 33.3% 100.0% $66,667 $33,333 $100,000 Budgeted overhead $452,581 S547, 619. $1,000,000 \3B) SEQUENTIAL METHOD In this method, the service departments do transfer their budgeted overhead to other service departments as well as to production departments. Overhead is transferred as a waterfall, always forward never bakewards. When a service department allocates its overhead, that department will not receive any more overhead from other service departments. The way to calculate the percetages is exactly the same as in the Direct Method Mas 0 menos asi: SEQUENTIAL METHOD id Staff Trimming ‘Assemble TOTAL Budgeted overhead $60,000, $100,000 $350,000 ‘$500,000 $1,000,000 IT Allocation $60,000 # Services 300 500 200 4,000 % arto sto 2no 30.0% 50.0% 20.0% 100.0% $15,000 $25,000 $10,000 $50,000 Staff Allocation $115,000 # Employees 20 100 50 150 % Not considered 1015 Bis 66.7% 33.3% 100.0% $76,967 $38,333 $115,000 Budgeted overhead SA51,667. $545,335 $4,000,000 I+COST AND PRICE MANAGEMENT.-- Rocio Vega OVERHEAD ALLOCATION AND OVERHEAD RATES ‘The company Cheap Allocations, Inc. is comprised of 4 service departments and 3 production departments, The production departments are ‘Trimming (D1), Assembly (D2) and Painting (D3), ‘The service departments are the following sl ‘Training and Development services all departments and the secondary allocation of overhead costs is assigned by taking training hours used in each department as a base. (Sequential method) 82 Cleaning and Surveillance renders service to all departments except Training and Development (S1) and the base are cleaning hours (Sequential method) 83 Quality control assigns overhead costs only to production departments (Direct method) based on total units produced, s4 Material Handling renders its services to production departments exclusively (Direct method) and assigns overhead based on the kilograms of materials handled. Departments sa 2 3 sa D1 bz p3__| TOTAL Overhead budget 20KK $57,000 | $280,000 | $95,000 | $476,000 | $621,000 | $314,000 | $2,033,000 Training hours | 1,800 5,400 3,600 7,200 9,000 9,000 | 36,000 Cleaning hours 17,640 | 6860 | 31,360 | 18620 | 23,520 | 98,000 Units produced _ 350,000 | 525,000 | 875,000 | 1,750,000 Kgs. materials = 14g72_| 18,876 _|_23,452_|_57,200 ‘Note: For the Sequential method consider that $1 (Training and Development) assigns its overhead costs before $2 (Cleaning and Surveillance). Prepare one allocation table for the whole company including all of the departments. ‘Trimming (D1) and Assembly (D2) are capital-intensive processes and Painting (D3) is labor- ing (D1) and Assembly (D2) estimate they wil use 252,000 and 215,000 machine hours respectively. Painting (D3) estimates it will use 112,800 labor hours for the year 20XX. intensive REQUI e. Tri RED: Calculate the overhead rates for each of the production departments so they can carry out the overhead allocation process. If Trimming used 2 machine hours per unit, Assembly used 3 machine hours per unit and Painting used 4 hours of direct labor for every unit, determine the amount of overhead costs that should be allocated in total to every unit. \5COST AND PRICE MANAGEMENT.- Rocio Vega OVERHEAD ALLOCATION FROM SERVICE TO PRODUCTION DEPARTMENTS EX 7.5 Guan/Hansen/Mowen Sixth Edition Delille Company manufactures both traditional toothpaste and gel toothpaste, with each type of toothpaste produced in separate departments. Three support departments support the production departments: power, general factory and personnel. Budgeted data on the five departments are as follows: Support Departments Producing Departments Power General Fact. Personnel Traditional Gel Overhead $90,000 $300,000 $120,000 $137,500 $222,500 Machine hrs = 1,403 1345 8,000 24,000 Square feet 3,600 - 2,400 10,800 7,200 # Employees 8 B 7 18 4 The company does not brake overhead into fixed and variable components. The bases for allocation are: power-machine hours, general factory-square feet, and personnel- number of employees. Required: 1) Allocate the overhead costs to the producing departments using the direct method. 2) Using machine hours, compute departmental overhead rates that producing departments use to assign overhead costs to products, EX 7.6 Guan/Hanten/Mowen Sixth Edition Refer to the data in Exercise 7.5. The company has decided to use the sequential method of allocation instead of the direct method. Required 1) Allocate the overhead costs to the producing departments using the sequential method 2) Using machinge hours, compute departmental overhead rates. \oCOST AND PRICE MANAGEMENT.- Rocio Vega Overhead Allocat Indirect Allocations, Inc. has two support departments and two operating departments in the production area, This company uses job-order costing and needs help handling its factory overhead costs. Each one of the four departments has completed an overhead budget. To prepate the secondary allocation of factory overhead costs consider that Energy costs distributes its, overhead costs based on the usage of kilowatts- hour and Maintenance based on the maintenance hours used. Support Departments Production Departments Energy Maintenance nding Assembly Budgeted overhead $250,000 $160,000 $100,000 $60,000 #KW-hour 200,000 600,000 200,000 # Maint. hours 1,000 4,500 4,500 Calculate the assignment of costs that support departments must allocate to producing departments (secondary allocation) using the following methods: a) Direct b)Sequential 2.- If the Direct method is employed, determine the overhead rate for each producing department if Grinding uses machine hours and Assembly uses direct labor hours as an allocation base. The expected use is 80,000 machine hours and 90,000 direct labor hours respectively. 3. Based on the rates from the previous question, find the total amount of overhead to be applied to order no. 345, which used 300 machine hours and 470 direct labor hours.COST AND PRICE MANAGEMENT.- Rocio Vega OVERHEAD RATES AND COST ALLOCATION Gifienta,Ine. is trying to design a cost system to effectively manage its overhead. ‘The company would like to determine how much overhead should be assigned to each product and they provide the following information: Gifienta, Inc. has three support departments and three production departments. Relevant information and details necessary to prepare a secondary allocation are stated below (the first three are support depts.) Security Training 1g Welding Polishing Budgeted overhead $80,000 $100,000 $200,000 $500,000 $700,000 $150,000 Allocation base: m2 training hrs. # projects Square meters 900 400 1,600 700 500 Training hours 20 - 60 300 400 150 No. Of projects 2 - 10 18 6 To calculate departmental overhead rates, the following allocation bases were estimated: ‘Trimming plans to use 5,000 machine hours, Welding 7,000 direct labor hours and Polishing 2,000 liters of fuel. the following for each one of the two allocation methods (1) a) Departmental overhead rate for each production department b) [each unit produced requires 2 machine hours, 5 direct labor hours and 0.8 Its of fuel, determine the overhead that should be allocated to each unit of product (4) Forthe Sequential Mat, allow the rer mentioned nthe tbl shown above fist Security, hen Tain, ad ally \8COST AND PR cE MANAGEMENT.- Rocio Vega OVRHEAD RATES 4.19 Anderson. Predetermined Overhead Rates. A company that employs the perpetual inventory method is using predetermined “overhead rates to assign these costs to production. Budgeted overhead expenses for Department 43 for the year 20XX, are made up by the following accounts: Cost Concept Budgeted amount for 20XX (S) Supervisors’ salaries 210,000 Tools and supplies 90,000 Equipment depreeiati 140,000 Factory rent 60,000 Accesories for machines 20,000 Repairs and maintenance 80,000 ‘Total Estimated overhead 600,000 Based on the budgeted volume of production, the estimated direct labor hours for the year are 300,000 and the estimated cost of direct labor is $1,200,000. Required: a) Caleulate the predetermined overhead rate for 20XX using direet labor hours as a base. b) If 400,000 direct labor hours are used for job-order 344, how much ‘overhead should be applied to this order? ©) Caleulate the predetermined overhead rate for 20XX using direct labor cost as a base. 4d) If$1,800,000 of direct labor costs were paid for order 344, how much ‘overhead corresponds to this order? 4COST AND PRICE MANAGEMENT.- Rocio Vega OVERHEAD ALLOCATION USING RATES 5-4 Polimeni. Manufacturing overhead. Narrows Corporation applies overhead manufacturing costs based on direct labor hours in Department F, based on direct materials costs in Department M, and based on machine hours in Department S. The company prepared the following estimations for the fiscal year that begins May 1 2XX8. Departament F Departament M___ Departament S Direct labor hours, ‘8500 10,500 5,000 Direct labor costs $7,250 $9,200 $4,500 Direct materials costs $6,000 $9,500 $3,250 Machine hours 3600 6,295 900 Overhead costs $16,000 $22,000 $10,000 The cost sheet for Job No. 525 shows this information for September Departament F Departament M__ Departament S Direct labor hours 5 per unit 7 per unit 3 per unit Direct labor costs $7.50 per unit $11.00 per unit $4.50 per unit Direct materials costs $4.75 per unit $6.25 per unit $2.00 per unit Machine hours 3 per unit 2 per unit 5 per unit a, What should be the overhead rate for Departments, F, M and S? b. How much overhead costs should be allocated to every unit of Job 525? ¢. If Job 525 has 75 units of product, what should be the total cost of that job? 20COSTAND PRICE MANAGEMENT.- Rocio Vega Overhead Allocation Ex. Anderson Allocation, Inc. manufactures screws. The company has three service departments: Maintenance, Tools and Inspection, and two production departments: Grooving and Shaping. To calculate the estimated rates for the allocation of overhead expenses, each one of the departments has budgeted their overhead expenses for the following year, which are presented below: Maintenance $27,520 Tools $61,600 Inspection $20,550 Shaping $48,535 Grooving $41,795, Total budget $200,000 This company uses a combined method(both methods included in one allocation table) to execute the secondary allocation of its overhead and has the following information to get it through: a) The department of Maintenance distributes its overhead to all departments, including the service departments. This distribution is made based on the expected number of service requests. This information is presented here: No. Of service requests: Tools 640 Inspection 145 Shaping 1,164 Grooving 803 Total expected requests 2,752 b) The department of Tools allocates its budgeted overhead directly to the production departments, using expected machine hours as a base. Shaping estimates to use 54,400 machine hours and Grooving 81,600. c) The Inspection department also assigns its overhead budget only to production departments, using units produced as the base. Both Shaping and Grooving expect to produce 42,000 units each. To calculate the overhead rate for each production department the company has chosen direct labor hours as the allocation base. Shaping 2lestimates 54,400 direct labor hours and Grooving estimates 13,600 direct labor hours. Determine: 1) Amount of overhead costs that Tools allocates to Grooving 2) The overhead rate of the Shaping department 3) If the actual direct labor hours used in Shaping and Grooving were 2hrs/unit and 3hrs/unit, respectively, determine the amount of overhead that should be applied to every unit. 22COST AND PRICE MANAGEMENT.- Rocio Vega OVERHEAD ALLOCATION, OH RATES AND APPLIED OH 5.25 Anderson Summer Time, Inc. uses the Sequential Method in all its departments to allocate overhead from its service departments to its production departments. There are 3 production departments: Grinding, Polishing and Finishing. The costs for the 4 support departments are allocated in the following order: Security, Repairs, Service, and Engineering. The allocation bases are presented below (marked with *) along with the overhead budget for each department for year 2XXX: Department Overhead budget Labor hrs*1 #ofemployees*2 Sq. mts *3 Grinding $100,000 3,000 100 3,000 Polishing $40,000 2,000 125 2,000 Finishing $60,000 4,000 15 2,000 *2 $30,000 1,000 10 500 Repairs *1 $50,000 5,000 80 1,500 Service *3 $70,000 6,000 20 1,000 Engineering *1 $20,000 3,000 90 500 Every production departmen uses the following estimated bases to calculate its overead rate: Estimated base: Grinding: 80,000 Machine hours Polishing 60,000 Machine hours Finishing 90,000 Machine hours Every unit of product actually used: In Grinding: 2 Machine hours In Polishing 3 Machine hours In Finishing 4 Machine hours Required: 1) Determine the total overead budget for Polishing 2) Amount of the overhead budget that Engineering transferred to the Finishing Department. 3) Overhead rate of every production department 4) Amount of overhead that should be applied to every unit 23