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Allocating Costs of Support Departments

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The Central Valley Company has prepared department overhead budgets for budgeted-volume levels before allocations as follows: (see attachment)

Management has decided that the most appropriate inventory costs are achieved by using individual-department overhead rates. These rates are developed after support-department costs are allocated to operating departments.

Bases for allocation are to be selected from the following: (see attachment)

Answer the following:

1. Using the step-down method, allocate support-department costs. Develop overhead rates per direct manufacturing labor-hour for machining and assembly. Allocate the costs of the support departments in the order given in this problem. USe the allocation base for each support department you think is the most appropriate.

2. Using the direct method, rework requirement 1

3. Based on the following information about two jobs, determine the total overhead costs for each job by using rates developed in (a) requirement 1 and (b) requirement 2

Direct Manufacturing Labor-Hours

Job Name Machining Assembly
Job 88 18 2
Job 89 3 17

4. The company evaluates the performance of the operating department managers on the basis of how well they managed their total costs, including allocated costs. As the manager of the Machining Department, which allocation method would you prefer from the results obtained in requirements 1 and 2? Explain.

Please use the attached excel file to work the problems. Thank you!

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Solution Summary

The expert examines allocating costs of support departments.