Reference no: EM13572340

DSL Company has two manufacturing departments - the Machining Department and the Assembly Department. Each department has a different overhead cost driver - machine hours in the Machining Department and assembly labor hours in the Assembly Department. Different jobs need different amounts of machining and assembly resources. The company allocates Machining Department overhead costs using machine hours and Assembly Department overhead costs using labor hours. Details of the company's budgeted manufacturing overhead costs of $1,120,000 for 2014 are shown below:

	Support Departments		Operating Departments
Expense	Engineering and Production Control	Materials Management	Machining	Assembly	Total Budget
Supervisors Salary	48,000	40,000	52,000	60,000	200,000
Engineering salaries	110,000	36,000	60,000	24,000	230,000
Depreciation and maintenance	39,000	55,000	79,000	20,000	193,000
Indirect materials	20,000	12,000	11,000	7,000	50,000
Indirect labor	43,000	63,000	44,000	45,000	195,000
Rent, utilities and insurance	16,000	24,000	64,000	48,000	152,000
Plant admin	24,000	20,000	26,000	30,000	100,000
	300,000	250,000	336,000	234,000	$       1,120,000

The Engineering and Production Control Department supports all the engineering activity in the other departments. The Materials Management Department is responsible for managing and moving materials and components required for different jobs. Each job at the company is different and requires small quantities of unique components to be machined and assembled.

The overhead rate for the Machining Department is based upon 10,000 machine hours. The overhead rate for the Assembly Department is based upon 20,000 direct labor hours.

MANAGEMENT XL122                                                                     SPRING 2014

The departmental costs and support percentages are shown below:

	Support Departments			Operating Departments
	Engineering and Production Control	Materials Management		Machining	Assembly		Total Budget
Overhead Budget before allocations	300,000	250,000		336,000	234,000		1,120,000
Services Provided by
Engineering and Production Control
Salaries		36,000		60,000	24,000		120,000
Percentage		30%		50%	20%		100%
Materials Management
Labor Hours	400			800	2,800		4,000
Percentage	10%			20%	70%		100%

Assume the company has two service departments and their costs are recorded in these departments and are allocated to two production departments. All four departments share the same building. Each service department is an intermediate cost center whose costs are recorded as incurred and then distributed to other cost centers.

Requirements

You have been hired as consultant to the company. Prepare an analysis and letter to the president allocating the overhead costs and determining the total departmental costs and their respective overhead rates based upon the following methods:

1. Direct method
2. Step method
3. Reciprocal method