Task 1: Direct Method for Service Department Allocation
Wheelick Controls Company has two producing departments, Mechanical Instruments and Electronic Instruments. In addition, there are two service departments, Building Services and Materials Receiving and Handling. The company purchases a variety of component parts from which the departments assemble instruments for sale in domestic and international markets.
The Electronic Instruments division is highly automated. The manufacturing costs depend primarily on the number of subcomponents in each instrument. In contrast, the Mechanical Instruments division relies primarily on a large labor force to hand-assemble instruments. Its costs depend on direct-labor hours.
The costs of Building Services depend primarily on the square footage occupied. The costs of Materials Receiving and Handling depend primarily on the total number of components handled. Instruments M1 and M2 are produced in the Mechanical Instruments department, and E1 and E2 are produced in the Electronic Instruments department. Data about these products follow:
Direct-Materials Cost Number of Components Direct-Labor Hours
M1 $74 25 4.0
M2 86 21 8.0
E1 63 10 1.5
E2 91 15 1.0
Budget figures for 20X7 include:
Building Materials Mechanical Electronic
Service Receiving and Handling Instruments Instruments
Direct department costs $150,000 $120,000 $680,000 $548,000
(excluding direct materials cost)
Square footage occupied 5,000 50,000 25,000
Number of final instruments 8,000 10,000
produced
Average number of components 10 16
per instrument
Direct-labor hours 30,000 8,000
1. Allocate the costs of the service departments using the direct method.
2. Using the results of number 1, compute the cost per direct-labor hour in the Mechanical Instruments department and the cost per component in the Electronic Instruments department.
3. Using the results of number 2, compute the cost per unit of product for instruments M1, M2, E1 and E2.
Task 2: Step-Down Method for Service Department Allocation
1. Allocate the costs of the service departments using the step-down method.
2. Using the results of number 1, compute the cost per direct-labor hour in the Mechanical Instruments department and the cost per component in the Electronic Instruments department.
3. Using the results of number 2, compute the cost per unit of product for instruments M1, M2, E1 and E2.