Question :
Support department cost allocation (12 marks) Westmead Instrument Company manufactures gauges for the construction industry.
The company has two production departments: Machining and Finishing.
There are also three support departments: Human Resources (HR), Maintenance and Design. The budgeted overhead costs for the year for each department are as follows:
HR $250,000
Maintenance 230,000
Design 350,000
Machining 800,000
Finishing 400,000
The budgeted machine hours for the Machining Department are 30,000, and the budgeted direct labour hours for the Finishing Department are 10,000.
These activities are used to allocate manufacturing overhead costs to products in the two departments. The usage of the support departments' output for the year is as follows:
Provision of Service Output (hours of service) Provider of the service User of the service HR Maintenance Design HR - - - Maintenance 500 - - Design 500 500 - Machining 4,000 3,500 4,500 Finishing 5,000 4,000 1,500 Total 10,000 8,000 6,000 Required:
1. Assuming Westmead Instrument Company uses sequential (or step) method based on support department that serves the largest number of other support departments is allocated first. List the sequence that should be used to allocate the support department costs to production departments using the step-down method.
2. Use the sequential method to allocate support costs to production departments, and determine the predetermined manufacturing overhead rates for the two production departments.