Bezos Ltd is developing departmental overhead rates based on machine hours for its moulding department and direct labour hours for its assembly department. The moulding department has 20 machines that each run for 2,000 hours per year. The assembly department employs 80 people, who each work 2,000 hours per year. The production related overhead costs distributed to the moulding and assembly departments are budgeted at $500,000 and $740,000 respectively. Two support departments, repairs and engineering, directly support the two production departments, moulding and assembly. These support departments have budgeted costs of $100,000 and $580,000 respectively. The production departments’ overhead rate cannot by determined until the support department costs are allocated.
The following schedule reflects use of the output of the repairs and engineering departments by the various departments.
|Repairs (repair hours)||0||2,000||3,000||15,000|
|Engineering (kilowatt hours)||250,000||0||850,000||150,000|
- Calculate the overhead rates per machine hour for the moulding department and per direct labour hour for the assembly department. Use the direct method to allocate support department costs.
- Estimate the overhead cost of a thingamebob, which is produced using 3 machine hours in the moulding department and 5 labour hours in the assembly department.
- Using the step-down method to allocate support department costs, calculate the overhead rates per machine hour for the moulding department and per direct labour hour for the assembly department. Allocate the repairs department costs first.
- Now estimate the cost of the thingamebob using the overhead rates estimated in part 3.
- Using the reciprocal services method to allocate support department costs, calculate the overhead rates per machine hour for the moulding department and per direct labour hour for the assembly department.
- Now estimate the cost of the thingamebob using the overhead rates estimated in part 5.
- Prepare a short memo to the Chief Financial Officer of Bezos Ltd, explaining which of the three methods of support department cost allocation results in the most accurate overhead rates and product costs. Explain why this is the most accurate method and why accuracy is important.
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