Allocation: Direct and Sequential Methods
Barok Manufacturing produces machine parts on a job-order basis. Most business is obtained through bidding. Most firms competing with Barok bid full cost plus a 20 percent markup. Recently, with the expectation of gaining more sales, Barok reduced its markup from 25 percent to 20 percent. The company operates two service departments and two producing departments. The budgeted costs and the normal activity levels for each department are given below.
|
Service Departments
|
Producing Departments
|
|
A
|
B
|
C
|
D
|
|
Direct overhead costs
|
$100,000
|
$200,000
|
$100,000
|
$50,000
|
|
Number of employees
|
8
|
7
|
30
|
30
|
|
Maintenance hours
|
2,000
|
200
|
6,400
|
1,600
|
|
Machine hours
|
-
|
-
|
10,000
|
1,000
|
|
Labor hours
|
-
|
-
|
1,000
|
10,000
|
The direct costs of Department A are allocated on the basis of employees; those of Department B are allocated on the basis of maintenance hours. Departmental overhead rates are used to assign costs to products. Department C uses machine hours, and Department D uses labor hours.
The firm is preparing to bid on a job (Job K) that requires three machine hours per unit produced in Department C and no time in Department D. The expected prime costs per unit are $67.
Required:
1. Allocate the service costs to the producing departments by using the direct method.
2. What will the bid be for Job K if the direct method of allocation is used?
3. Allocate the service costs to the producing departments by using the sequential method.
4. What will the bid be for Job K if the sequential method is used?