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KENTUCKY CORPORATION   …

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KENTUCKY CORPORATION

 

….. manufactures widgets in two processes: Assembly and Finishing.  They use a process costing system with the weighted average method and normal costing using departmental overhead rates to account for costs in the Assembly and Finishing departments.  Since the process is very labor intensive, the nature of the overhead is such that the production departments allocate manufacturing overhead costs on the basis of direct labor hours, which it feels is the most appropriate cost driver.

 

Prior to the start of the year, the following information is BUDGETED for the company’s two support departments and their two producing departments.  At the end of the year, the company also wishes to evaluate how effectively the managers of the Assembly and Finishing Departments controlled their costs.

 

The company uses a single-rate allocation system and, accordingly, makes NO ATTEMPT to separately allocate the fixed and variable support department costs (duel rate). 

 

The company breaks the overhead cost pool into two separate pools.  The first is Receiving, which consists of all the costs related to receiving, inspecting, sorting, moving and stocking of various materials and parts.  The company has identified all of the activities that relate to this function, and the amount of costs related to each and allocates that cost pool based on the number of receiving orders (called “receivers”).  All of the other indirect manufacturing costs not directly traceable to an individual producing department are gathered in another cost pool called “General Factory”.  General Factory, therefore, is considered to be providing more services to the Receiving Department than the other way around.  General Factory costs are allocated on the basis of square feet.

 

Required:

 

1. What are general reasons for allocating the costs of services within an organization?  List 4 and BRIEFLY mention why each is important
2. Assume that, prior to the start of the year, we need to determine the predetermined overhead application rates for Assembly and Finishing for the upcoming year; that is, we are doing product costing.   The following budgeted information is available:

 

 

Using the Direct Method:

1. What’s the “charge rate” going to be for both General Factory and Receiving functions?
2. Allocate the costs of the General Factory and Receiving to the production departments.

 

3. Determine the predetermined overhead-application rates that the Assembly and Finishing department will use for product costing during the year.  Round any intermediate calculations to 4 decimal places and use those rounded numbers in subsequent computations.  Round your final departmental allocations to the nearest dollar.

 

Using the Step (or Sequential) Method:

1. What’s the “charge rate” going to be for both General Factory and Receiving functions?
2. to determine the overhead-application rates that the Assembly and Finishing department will use for product costing during the year.  Round any intermediate calculations to 4 decimal places and use those rounded numbers in subsequent computations. Round your final departmental allocations to the nearest dollar.

 

END OF YEAR

 

NOW ASSUME that the year is completed, the company decided to use the Direct Method, and management is in the process of evaluating the performance of the Assembly and Finishing departments.  Since these two departments are cost centers, they are evaluated strictly on the basis of how well they controlled costs during the year.  Managerial bonuses are based in part, on these figures.

 

As things turned out, as expected, the actual costs of the support departments were different than originally budgeted.  Turns out that the people in the receiving department were very inefficient in their operations and, although we anticipated that the departmental costs would be about $160,000, they were in fact MUCH higher, $200,000.  This was caused mainly by extravagant spending and inefficiency.

 

Also, as it turned out, the Finishing Department had redesigned their department and, accordingly, only utilized an average of 5,000 square feet of floor space during the year.  In addition, as expected, the number of receivers was different than originally budgeted for both production departments

 

Direct overhead traceable to individual departments also was different than expected, as did the number of direct labor hours.

 

The following ACTUAL results were achieved:

 

 

 

Using the direct method only, answer the following:

 

3. You have been asked to assist in the evaluation of the cost control for the Assembly and Finishing Departments.  For this purpose, how much support department cost should be allocated to (charged to) the Assembly and Finishing Departments for the year?  HINT:  How much SHOULD each of these departments be accountable for? 

 

4. Was there any difference between the amount of costs actually incurred by the support departments and the amounts that you allocated to Assembly and Finishing?  Does this sound “right”? Explain why this is so.
5. How much overhead was applied in both departments during the year?
6. Was overhead under- or over-applied?  By how much?