Assignment Task: Good Bites Inc. (GBI), the Minnesota subsidiary of Swedish Snack Sensations (SSS), produces two types of snack foods: Chillin' Cheese canned cheese spread and Lutfisk Finger crackers. GBI produces these products on two separate production lines in Brainerd MN. The company also has three main support departments: Cafeteria, Maintenance, and Medical. (Both products have a tendency to causes nausea and the occasional loss of consciousness among production workers. Hence the Medical support department.)
While there is a large market for these products in Minnesota and Wisconsin, GBI mostly sells its products back to its parent company (SSS). In order to correctly price its products and to measure the profitability, GBI needs to allocate the support department costs to the production departments and eventually to the snack food units produced.
SSS has assigned $1,750,000 of corporate overhead costs to GBI. Olaf Olasky, GBIs controller, has decided to initially assign these corporate costs to all departments using two rates. The first will assign $1,000,000 based on department square footage. The second will assign the remaining overhead based on the number of employees in each department.
Now Olaf is trying to decide between the direct, step-down, and reciprocal method to assign the costs in the support departments to the production departments.
|
Provided by (measure of service)
|
Support Departments
|
Support Provided to Production Departments
|
|
Cafeteria
|
Maintenance
|
Medical
|
Chillin' Cheese
|
Lutfis Fingers
|
|
Cafeteria (number of employees)
|
|
12
|
3
|
150
|
300
|
|
Maintenance (service calls)
|
5
|
|
2
|
13
|
25
|
|
Medical (medical events)
|
2
|
6
|
|
18
|
64
|
|
Square Footage
|
3000
|
1500
|
1050
|
5700
|
3750
|
*The Cafeteria employs 5 workers.
Required: Determine the total amount of overhead assigned to each production department based on the three department costing methods. For each method, show your work to receive full credit. For the Direct Method start with Maintenance, then Cafeteria, then Medical. To receive full credit for the reciprocal method you must correctly solve the equations. You can receive partial credit if stop after correctly defining the equations.
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