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Step-Down Method versus Direct Method; Predetermined Overhead Rates [LO10, LO11]
Petah, Ltd., of Tel Aviv, Israel, has budgeted costs in its various departments as follows for the
coming year:
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 depart- ment and operating department costs) divided by total direct labor-hours. Compute the plant- wide 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 step- down method, the direct method, and the plantwide method. (Round allocations to the nearest whole shekel.)
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