Caro Manufacturing has two production departments, Machining and Assembly, and t
ID: 2587917 • Letter: C
Question
Caro Manufacturing has two production departments, Machining and Assembly, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of August follow:
Proportion of Services Used by
Depapment Direct Costs Maintenance Cafeteria Machining Assembly
Machining $ 99,000
Assembly 64,400
Maintenance 40,000 — 0.2 0.5 0.3
Cafeteria 32,000 0.8 — 0.1 0.1
Requrired
Compute the allocation of services department cost to producing department using the direct methop
total machinning assemblyExplanation / Answer
Solution:
Direct Distribution Method
Under this method, overheads of all service departments are distributed directly to the Production Department ignoring services rendered to other service dept.
Distribution of Service Departments Overhead to Production Departments
Machining
Assembly
Re-distribution of Overheads of Maintenance Dept to production department in the Ratio 0.5:0.3
25000
(40,000*0.5/0.8)
15000
(40,000*0.3/0.8)
Re-distribution of Overheads of Cafeteria Dept to production department in the Ratio 0.1:0.1
16000
(32000*0.1/0.2)
16000
(32000*0.1/0.2)
Total
41000
31000
Total Overheads of Service Dept distributed to Production Department
Machining = $41,000
Assembly = $31,000
Alternatively the total cost for Machining and Assembly Department is calculated as follows:
Machining
Assembly
Direct Cost (as per question)
$99,000
$64,400
Distribution of Overheads of Service Dept to production department as above
$41,000
$31,000
Total Cost
$140,000
$95,400
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Distribution of Service Departments Overhead to Production Departments
Machining
Assembly
Re-distribution of Overheads of Maintenance Dept to production department in the Ratio 0.5:0.3
25000
(40,000*0.5/0.8)
15000
(40,000*0.3/0.8)
Re-distribution of Overheads of Cafeteria Dept to production department in the Ratio 0.1:0.1
16000
(32000*0.1/0.2)
16000
(32000*0.1/0.2)
Total
41000
31000