Management Accounting Consultancy Report

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Week6-LectureSlides.pptx

MONASH BUSINESS

SCHOOL

Chapter 7 (excluding appendix) A Closer Look at Overhead Costs

1

For this topic you should be able to:

Explain the nature of overhead costs.

Describe general principles for allocating indirect costs to cost objects.

Allocate overhead costs to products using plant-wide and departmental rates.

Allocate support department costs to production department using direct, step-down and reciprocal methods.

Recognise costs & benefits of alternative approaches to allocating overheads.

Identify best practice in overhead allocation

And always….

Understand why overhead cost allocation is important and useful to managerial decision making

Critically analyse different options for allocating overhead costs and assess which would be most applicable to different contexts

To recap prior lectures….

Manufacturing overhead costs: all manufacturing costs other than direct material and direct labour costs

Cannot be traced economically to individual products

Non-manufacturing costs: all costs incurred outside of manufacturing – for example research & design, human resources, customer support

4

To recap prior lectures….

Cost assignment can take two forms:

Direct costs can be traced directly to products

Indirect costs (for example, those on the previous slide) cannot be traced to cost objects; therefore they need to be allocated

A cost pool is a collection of costs that are allocated to cost objects:

Have a common allocation base (i.e. common cost driver)

Often used to simplify the allocation process

5

Inspection costs

Quality Training

Data Storage

Salaries of IT

staff

Cleaning

Rent

Council Rates

Quality Control

Property

Computing

Product

or department

?

?

See example on next slide

Depending on whether job or process costing used

6

A cost allocation base is some factor or variable that allows us to allocate costs in a cost pool to cost objects

Preferably a cost driver

A cost driver is an activity or factor that causes a cost to be incurred

Determining cost allocation bases

For example: Quality Control cost pool (last slide)

Cost driver could be # of inspections

Product A is inspected more often than product B

So…more quality control overhead is allocated to Product A

7

Identifying overhead cost drivers

What is the major factor that causes the overhead cost to be incurred?

To what extent does the overhead cost vary in proportion with the cost driver?

How easy is it to measure the cost driver?

Helps increase accuracy of cost prediction

Helps keep cost prediction manageable

Tension?

8

Why bother allocating overhead costs?

Reliable product costs are important for a range of management decisions

What products should we produce?

What prices should we charge our customers?

How profitable are particular product lines?

What value are our goods in inventory? (last week’s lecture)

9

Allocating overheads in process costing

Two possible approaches:

A plant-wide rate

All overheads are placed in one large cost pool (not disaggregated by department)

A single cost driver is used to allocate overheads to products

Departmental rates

Overheads are allocated to departments based on departments’ usage of overhead costs

Separate cost driver used for each department to allocate overheads to products

The difference is the cost driver and type of cost pool used

Plant-wide rate

A plant-wide rate is a single overhead rate that is calculated for the entire production plant

One cost pool – all overhead costs included within it

Three steps:

Identify the overhead cost driver

Calculate the overhead rate per unit of cost driver

Apply the manufacturing overhead cost to the product based on the predetermined overhead rate and the product’s actual consumption of the cost driver

11

Plant-wide rate

Plant-wide overhead rate

=

Budgeted manufacturing overhead

Budgeted level of cost driver

Applied overhead

Plant-wide overhead rate

Actual quantity of cost driver consumed by the product

=

×

Step 2:

Step 3:

12

Lecture illustration #1

Based on the results of lecture illustration #1, consider the following information:

Product XYZ is produced in the two production departments (P1 and P2).

Product XYZ’s prime cost is $250 per unit

Production of XYZ requires 4 DLHrs in P1 and 15 DLHrs in P2

Required:

Calculate the unit manufacturing cost of product XYZ.

7-14

Calculating product cost

14

Departmental rates

Departmental overhead rates recognise that overheads in each department may be driven by different cost drivers

For example…

Paint department might be labour intensive (cost driver = direct labour hours)

Assembly might be machine intensive (cost driver = machine hours)

15

Departmental rates

Two-stage cost allocation for department overhead rates

Stage one: Overhead costs are assigned to production departments (separate cost pool for each department)

Step 1: Overhead costs are allocated to all departments

Step 2: Support department costs are reassigned to overhead cost pools in the production departments

16

Departmental rates: Stage One

Total cost pool of production department will be overhead costs allocated directly to it (Step 1) and costs allocated to it from support departments (Step 2)

Products don’t pass through these departments so we must allocate their costs to production departments in order to cost products

7-18

18

Departmental rates

Stage two: overhead costs are applied to products

Manufacturing overhead rates are calculated for each production department

7-19

Predetermined manufacturing overhead rate

=

Budgeted manufacturing overhead

Budgeted level of cost driver

Applied overhead

Predetermined overhead rate

Actual quantity of cost driver consumed by the product

=

×

19

Let’s do stage two first

We’ll come back to stage one

afterwards

20

Lecture illustration #1 continued Stage two:

Based on the results of lecture illustration #1, consider the following information:

Product XYZ is produced in the two production departments (P1 and P2).

Product XYZ’s prime cost is $250 per unit

Production of XYZ requires 1 DLHrs in P1 and 15 DLHrs in P2

Production of XYZ requires 17 MHrs in P1 and 2 MHrs in P2

Required:

Calculate the unit manufacturing cost of product XYZ.

7-22

Calculating product cost

22

Stage One: Allocating support department costs

Informs user departments of the cost of the services that they are using, to assist them with planning and control of that usage

Allocation methods include:

Direct: supports department costs to be allocated directly to production departments

Step-down: partially recognises the services provided by one support department to another

Reciprocal services: fully recognises the provision of services between support departments

23

Children’s Health Clinic

Administration

Housekeeping

Medical Department

Dental Department

Medical Patient Visit

Dental Patient Visit

Support Departments

Operating Departments

Cost Objects

Administration

Housekeeping

Medical Department Cost Pool

Dental Department Cost Pool

Medical Patient Visits

Dental Patient Visits

Direct Method

Allocate support department costs directly to production departments - ignores the support administration and housekeeping provide to each other

Stage 2

Stage 1

Administration

Housekeeping

Dental Department Cost Pool

Step-down Method: Step 1

Medical Department Cost Pool

First allocate costs of support department that provides services to the greatest number of other support departments (i.e. DO NOT count production departments)

Housekeeping

Medical Department Cost Pool

Dental Department Cost Pool

Medical Patient Visits

Dental Patient Visits

Step-down Method: Step 2

Then allocate costs of second support department (inclusive of allocated costs from first support department) to production departments only

Stage 2

Stage 1

Administration

Housekeeping

Reciprocal Method: Step 1

Simultaneously allocate costs among support departments

Administration

Housekeeping

Medical Department Cost Pool

Dental Department Cost Pool

Medical Patient Visits

Dental Patient Visits

Reciprocal Method: Step 2

Then…allocate these revised support costs from Step 1 to production departments

Stage 2

Stage 1

7-30

Lecture illustration #2

Cost drivers

Round all calculations to two decimal places

Required:

Allocate support department costs to production departments and

calculate a predetermined overhead rate for each production department

* The final sum of cost pools in P1 and P2 should equal this amount

to apply production department costs to products in Stage 2

to apply support department costs to production departments in Stage 1

*

30

16

1040

Ignore

Allocate support department costs directly to production departments

Direct Method

* From slide 30

*

*

*

*

*

*

Production departments share of support department costs based on cost driver

+

+

=

=

Step-down Method – Two important rules

Which support department should you allocate first?

First check to see if the question has specified which department to allocate first

If not, allocate first the support department which provides service to greatest number of other support departments – Rule 1

What if there is a tie?

Consider lecture illustration #2: both quality control and material handling provide services to one other support department

In this case, allocate first the support department with the largest overhead budget (in lecture illustration #2 – material handling) – Rule 2

Step-Down Method (cont’d)

16

1200

Ignore (only allocating MH fully)

+

+

=

=

+

Step 1: Allocate Material Handling costs to all departments

* From slide 30

Step 2: Allocate Quality Control costs (inclusive of allocated costs from Material Handling) directly to production departments

Basis for share of support department costs

*

*

*

*

*

*

5-33

Reciprocal Method

Specify equations for total operating costs of each support department:

QC = 27,000 + MH x 160/1200

MH = 33,000 + QC x 2/18

And solve them as simultaneous equations:

therefore QC = 27,000 + (33,000 + QC/9) x 16/120

therefore QC = $31,872.18

and MH = $36,541.35

Now refer back to Lecture illustration

5-34

34

Reciprocal Method (cont’d)

1200

+

=

+

Basis for share of support department costs

+

+

=

18

Allocate revised support department costs directly to production departments

* From slide 30

*

*

*

*

5-35

Based on the results of lecture illustration#2, consider the following information:

Product XYZ is produced in the two production departments (P1 and P2).

Product XYZ’s prime cost is $250 per unit

Production of XYZ requires 10 MHrs in P1 and 8 DLHs in P2

Required:

Calculate the unit manufacturing cost of product XYZ.

7-36

Lecture illustration #3

36

Lecture Illustration #3 (cont’d)

5-37

37

Which allocation method is best?

If using plant-wide rate - select a cost driver that is common to all products

Where reciprocal relationships are strong, the reciprocal services method may be appropriate

However, the direct method is often used when the cost of obtaining information regarding services between support departments is too high (….and not worth the effort) or there are not many (or significant) intra-support department activities

Choice should be based on costs versus benefits

Consider allocation bases and their accuracy

Beware of arbitrary and inaccurate cost allocation

The accuracy of costing systems often depends more on the cost drivers chosen rather than overall overhead allocation method

7-38

38

Budgeted vs. actual overhead rates

Trade-off between timeliness and accuracy

Budgeted rates calculated prior to the commencement of the year

More timely

Actual rates calculated after the end of the year

More accurate

Usually budgeted costs and budgeted amounts of cost drivers are used to calculate overhead rates rather than actual costs and actual amounts of cost drivers

7-39

39

Over what period should overhead rates be set?

Yearly rates are generally used for internal decision making

Monthly rates tend to fluctuate due to price changes and seasonal factors

A normalised overhead rate is an overhead rate calculated over a relatively long period

Smooths out fluctuations in overhead rates, therefore smoothing out product costs

7-40

40

The arbitrary nature of these cost allocation methods is a limitation of traditional product costing systems

In the lecture illustration, despite the increased accuracy of the departmental method in comparison to the plant-wide rate, we still allocated overhead costs to products based on volume-based cost drivers

Non-volume-based cost drivers

Not all aspects of manufacturing overhead vary with production volume

Need to be careful allocating fixed costs with a volume-based cost driver

Activity-based costing recognises both volume-based and non-volume-based cost drivers

7-41

Volume vs. non-volume based cost drivers

41

Acknowledgement

Some of the slides contained in this presentation were adapted from:

PowerPoint slides to accompany Management Accounting: Information for managing and creating value 8e

Copyright © 2018 McGraw-Hill Australia Pty Ltd

42

Dept & PW approaches

Lecture Illustration #1
Plant-wide and departmental overhead rates
Production depts P1 P2 Plant-wide
Overhead $35,000 $42,000 $77,000
Total budgeted drivers 3,000 MHr 400 MHr 3,400 MHr
200 DLHr 4,000 DLHr 4,200 DLHr
Plant-wide approach (using DLHrs)
Plant-wide approach (using DLHrs) P1 P2 Plant-wide
Total budgeted overhead $77,000
Total budgeted driver 4,200 DLHr
Plant-wide allocation rate $18.33 per DLHr $18.33 per DLHr $18.33 per DLHr
Departmental approach ( using DLHs as cost driver )
Departmental approach P1 P2 Plant-wide
Total budgeted overhead $35,000 $42,000
Total budgeted driver 200 DLHr 4,000 DLHr
Departmental allocation rate $175 per DLHr $10.50 per DLHr
Now choose the most appropriate cost driver for each departments
Notice that P1 is "machine intensive" and P2 is "labour intensive" . What does this imply for choice of driver?
Departmental approach using alternative drivers P1 P2 Plant-wide
Total budgeted overhead $35,000 $42,000
Total budgeted driver 3,000 MHr 4,000 DLHr
Departmental allocation rate $11.67 per MHr $10.50 per DLHr

Sheet1

Lecture Illustration #1
Plant-wide and departmental overhead rates
Production depts P1 P2 Plant-wide
Overhead $35,000 $42,000 $77,000
Total budgeted drivers 3,000 MHr 400 MHr 3,400 MHr
200 DLHr 4,000 DLHr 4,200 DLHr
Plant-wide approach (using DLHrs)
Plant-wide approach (using DLHrs) P1 P2 Plant-wide
Total budgeted overhead $77,000
Total budgeted driver 4,200 DLHr
Plant-wide allocation rate
Departmental approach ( using DLHs as cost driver )
Departmental approach P1 P2 Plant-wide
Total budgeted overhead $35,000 $42,000
Total budgeted driver 200 DLHr 4,000 DLHr
Departmental allocation rate 0
Now choose the most appropriate cost driver for each departments
Notice that P1 is "machine intensive" and P2 is "labour intensive" . What does this imply for choice of driver?
Departmental approach using alternative drivers P1 P2 Plant-wide
Total budgeted overhead $35,000 $42,000
Total budgeted driver 3,000 MHr 4,000 DLHr
Departmental allocation rate

2x2 support dept allocn

for reciprocal method:
p= 0.1333333333
q= 0.1111111111
Lecture Illustration #2
Production depts Overhead Driver vol Driver unit
P1 $35,000 3,000 MHr
P2 $42,000 4,000 DLHr
Support Depts
Quality Control $27,000
Material Handling $33,000
Total overhead $137,000
Support Dept service Provision total volume units Quality Control Material Handling P1 P2
Quality Control 18 CPUs 2 10 6 16
Material Handling 1200 Employees 160 200 840 1040
a. DIRECT METHOD Quality Control Material Handling P1 P2 Total
Dept Overhead $27,000 $33,000 $35,000.00 $42,000.00
Allocate Quality Control 10/16 $16,875.00 6/16 $10,125.00
Allocate Material Handling 200/1040 $6,346.15 840/1040 $26,653.85
Totals $58,221.15 $78,778.85 $137,000
Quantity of cost driver 3,000 4,000
Departmental OH rates: $19.41 $19.69
per MHr per DLHr
b. STEP DOWN METHOD Quality Control Material Handling P1 P2 Total
Dept Overhead $27,000 $33,000 $35,000.00 $42,000.00
Allocate Material Handling 20/100 $4,400 200/1200 $5,500.00 840/1200 $23,100.00
Allocate Quality Control $31,400 10/16 $19,625.00 6/16 $11,775.00
Totals $60,125.00 $76,875.00 $137,000
Quantity of cost driver 3,000 4,000
Departmental OH rates: $20.04 $19.22
per MHr per DLHr
3. RECIPROCAL METHOD Quality Control Material Handling P1 P2 Total
Dept Overhead $27,000 $33,000 $35,000.00 $42,000.00
Allocate Quality Control $31,872.18 10/18 $17,706.77 6/18 $10,624.06
Allocate Material Handling $36,541.35 200/1200 $6,090.23 840/1200 $25,578.95
Total $58,797.00 $78,203.01 $137,000
Quantity of cost driver 3,000 4,000
Departmental OH rates: $19.60 $19.55
per MHr per DLHr

Product Cost

Lecture illustration #3
Unit cost calculation for product XYZ:
1. Using Direct Method
Prime costs $ 250.00
Overhead cost:
P1 $ 194.10 (10Mhr x $19.41)
P2 $ 157.52 (8 DLhr x $19.69)
Total unit cost of XYZ $ 601.62
2. Using Step Down Method
Prime costs $ 250.00
Overhead cost:
P1 $ 200.40 (10Mhr x $20.04)
P2 $ 153.76 (8 DLhr x $19.22)
Total unit cost of XYZ $604.16
3. Using Reciprocal Method
Prime costs $ 250.00
Overhead cost:
P1 $ 196.00 (10Mhr x $19.60)
P2 $ 156.40 (8 DLhr x $19.55)
Total unit cost of XYZ $ 602.40
NOTE THE VARIATION IN FINAL PRODUCT COST DEPENDENT ON METHOD USED

Lecture Illustration #1

Plant-wide and departmental overhead rates

Production deptsP1P2Plant-wide

Overhead$35,000$42,000$77,000

Total budgeted drivers3,000MHr400MHr3,400MHr

200DLHr4,000DLHr4,200DLHr

Plant-wide approach (using DLHrs)

Plant-wide approach (using DLHrs)P1P2Plant-wide

Total budgeted overhead $77,000

Total budgeted driver 4,200DLHr

Plant-wide allocation rate

Unit cost calculation for product XYZ:

Prime costs250.00$

Overhead cost:348.27$

(4 + 15 DLhrs x $18.33)

Total unit cost of XYZ 598.27$

Dept & PW approaches

Lecture Illustration #1
Plant-wide and departmental overhead rates
Production depts P1 P2 Plant-wide
Overhead $35,000 $42,000 $77,000
Total budgeted drivers 3,000 MHr 400 MHr 3,400 MHr
200 DLHr 4,000 DLHr 4,200 DLHr
Plant-wide approach (using DLHrs)
Plant-wide approach (using DLHrs) P1 P2 Plant-wide
Total budgeted overhead $77,000
Total budgeted driver 4,200 DLHr
Plant-wide allocation rate $18.33 per DLHr $18.33 per DLHr $18.33 per DLHr
Departmental approach ( using DLHs as cost driver )
Departmental approach P1 P2 Plant-wide
Total budgeted overhead $35,000 $42,000
Total budgeted driver 200 DLHr 4,000 DLHr
Departmental allocation rate $175 per DLHr $10.50 per DLHr
Now choose the most appropriate cost driver for each departments
Notice that P1 is "machine intensive" and P2 is "labour intensive" . What does this imply for choice of driver?
Departmental approach using alternative drivers P1 P2 Plant-wide
Total budgeted overhead $35,000 $42,000
Total budgeted driver 3,000 MHr 4,000 DLHr
Departmental allocation rate $11.67 per MHr $10.50 per DLHr

Sheet1

Lecture Illustration #1
Plant-wide and departmental overhead rates
Production depts P1 P2 Plant-wide
Overhead $35,000 $42,000 $77,000
Total budgeted drivers 3,000 MHr 400 MHr 3,400 MHr
200 DLHr 4,000 DLHr 4,200 DLHr
Plant-wide approach (using DLHrs)
Plant-wide approach (using DLHrs) P1 P2 Plant-wide
Total budgeted overhead $77,000
Total budgeted driver 4,200 DLHr
Plant-wide allocation rate $18.33 per DLHr $18.33 per DLHr $18.33 per DLHr
Departmental approach ( using DLHs as cost driver )
Departmental approach P1 P2 Plant-wide
Total budgeted overhead $35,000 $42,000
Total budgeted driver 200 DLHr 4,000 DLHr
Departmental allocation rate per DLHr
Now choose the most appropriate cost driver for each departments
Notice that P1 is "machine intensive" and P2 is "labour intensive" . What does this imply for choice of driver?
Departmental approach using alternative drivers P1 P2 Plant-wide
Total budgeted overhead $35,000 $42,000
Total budgeted driver 3,000 MHr 4,000 DLHr
Departmental allocation rate

2x2 support dept allocn

for reciprocal method:
p= 0.1333333333
q= 0.1111111111
Lecture Illustration #2
Production depts Overhead Driver vol Driver unit
P1 $35,000 3,000 MHr
P2 $42,000 4,000 DLHr
Support Depts
Quality Control $27,000
Material Handling $33,000
Total overhead $137,000
Support Dept service Provision total volume units Quality Control Material Handling P1 P2
Quality Control 18 CPUs 2 10 6 16
Material Handling 1200 Employees 160 200 840 1040
a. DIRECT METHOD Quality Control Material Handling P1 P2 Total
Dept Overhead $27,000 $33,000 $35,000.00 $42,000.00
Allocate Quality Control 10/16 $16,875.00 6/16 $10,125.00
Allocate Material Handling 200/1040 $6,346.15 840/1040 $26,653.85
Totals $58,221.15 $78,778.85 $137,000
Quantity of cost driver 3,000 4,000
Departmental OH rates: $19.41 $19.69
per MHr per DLHr
b. STEP DOWN METHOD Quality Control Material Handling P1 P2 Total
Dept Overhead $27,000 $33,000 $35,000.00 $42,000.00
Allocate Material Handling 20/100 $4,400 200/1200 $5,500.00 840/1200 $23,100.00
Allocate Quality Control $31,400 10/16 $19,625.00 6/16 $11,775.00
Totals $60,125.00 $76,875.00 $137,000
Quantity of cost driver 3,000 4,000
Departmental OH rates: $20.04 $19.22
per MHr per DLHr
3. RECIPROCAL METHOD Quality Control Material Handling P1 P2 Total
Dept Overhead $27,000 $33,000 $35,000.00 $42,000.00
Allocate Quality Control $31,872.18 10/18 $17,706.77 6/18 $10,624.06
Allocate Material Handling $36,541.35 200/1200 $6,090.23 840/1200 $25,578.95
Total $58,797.00 $78,203.01 $137,000
Quantity of cost driver 3,000 4,000
Departmental OH rates: $19.60 $19.55
per MHr per DLHr

Product Cost

Lecture illustration #3
Unit cost calculation for product XYZ:
1. Using Direct Method
Prime costs $ 250.00
Overhead cost:
P1 $ 194.10 (10Mhr x $19.41)
P2 $ 157.52 (8 DLhr x $19.69)
Total unit cost of XYZ $ 601.62
2. Using Step Down Method
Prime costs $ 250.00
Overhead cost:
P1 $ 200.40 (10Mhr x $20.04)
P2 $ 153.76 (8 DLhr x $19.22)
Total unit cost of XYZ $604.16
3. Using Reciprocal Method
Prime costs $ 250.00
Overhead cost:
P1 $ 196.00 (10Mhr x $19.60)
P2 $ 156.40 (8 DLhr x $19.55)
Total unit cost of XYZ $ 602.40
NOTE THE VARIATION IN FINAL PRODUCT COST DEPENDENT ON METHOD USED

Lecture Illustration #1

Plant-wide and departmental overhead rates

Production deptsP1P2Plant-wide

Overhead$35,000$42,000$77,000

Total budgeted drivers3,000MHr400MHr3,400MHr

200DLHr4,000DLHr4,200DLHr

Plant-wide approach (using DLHrs)

Plant-wide approach (using DLHrs)P1P2Plant-wide

Total budgeted overhead $77,000

Total budgeted driver 4,200DLHr

Plant-wide allocation rate$18.33per DLHr$18.33per DLHr$18.33per DLHr

Departmental approach (using DLHs as cost driver)

Departmental approachP1P2Plant-wide

Total budgeted overhead$35,000$42,000

Total budgeted driver 200DLHr4,000DLHr

Departmental allocation rateper DLHr

Now choose the most appropriate cost driver for each departments

Notice that

P1 is "machine intensive"

and

P2 is "labour intensive"

. What does this imply for choice of driver?

Departmental approach using

alternative driversP1P2Plant-wide

Total budgeted overhead$35,000$42,000

Total budgeted driver 3,000MHr4,000DLHr

Departmental allocation rate

Using separate cost drivers

Prime costs250.00$

Overhead cost:

P1198.39$

(17 Mhrs x $11.67)

P2157.50$

(15 DLhrs x $10.50)

Total unit cost of XYZ $605.89

Production deptsOverheadDriver volDriver unit

P1

$35,0003,000

Machine hours (MHrs)

P2

$42,0004,000

Direct labour hours (DLHrs)

Support Depts

Quality Control

$27,000

Material handling$33,000

Total overhead$137,000

Support Dept service

Provision

total

volumeunits

Quality

Control

Material

handlingP1P2

Quality Control

18employees2106

Material handling

1200m

2

160200840

Support Dept service

Provision

total volumeunits

Quality

Control (QC)

Material

Handling

(MH)P1P2

Quality Control (QC)18

employees2106

Material Handling (MH)1200

m

2

160200840

1. DIRECT METHOD

Quality

Control

(QC)

Material

Handling

(MH)P1 shareP1P2 shareP2Total

Dept Overhead$27,000$33,000$35,000$42,000$137,000

Allocate QC10/16$16,8756/16$10,125$27,000

Allocate MH200/1040$6,346840/1040$26,654$33,000

Totals$58,221$78,779$137,000

Quantity of cost driver3,0004,000

Departmental OH rates:$19.41$19.69

per MHrper DLHr

Support Dept service

Provision

total volumeunits

Quality

Control (QC)

Material

Handling

(MH)P1P2

Quality Control (QC)18

employees2106

Material Handling (MH)1200

m

2

160200840

2. STEP DOWN METHODQC share

Quality

Control

(QC)MH share

Material

Handling

(MH)P1 shareP1P2 shareP2Total

Dept Overhead$27,000$33,000$35,000$42,000$137,000

Allocate MH160/1200$4,400200/1200$5,500840/1200$23,100$33,000

Allocate QC$31,40010/16$19,6256/16$11,775$31,400

Totals$60,125$76,875$137,000

Quantity of cost driver3,0004,000

Departmental OH rates:$20.04$19.22

per MHrper DLHr

Support Dept service

Provision

total volumeunits

Quality

Control (QC)

Material

Handling

(MH)P1P2

Quality Control (QC)18

employees2106

Material Handling (MH)1200

m

2

160200840

3. RECIPROCAL METHODQC share

Quality

Control MH share

Material

Handling P1P2Total

Dept Overhead$27,000$33,000$35,000$42,000$137,000

Allocate QC$31,87210/18$17,7076/18$10,624$28,331

Allocate MH$36,541200/1200$6,090840/1200$25,579$31,669

Total$58,797$78,203$137,000

Quantity of cost driver3,0004,000

Departmental OH rates:$19.60$19.55

per MHrper DLHr

1. Using Direct Method

Prime costs250.00$

Overhead cost:

P1194.10$

(10Mhr x $19.41)

P2157.52$

(8 DLhr x $19.69)

Total unit cost of XYZ 601.62$

2. Using Step Down Method

Prime costs250.00$

Overhead cost:

P1200.40$

(10Mhr x $20.04)

P2153.76$

(8 DLhr x $19.22)

Total unit cost of XYZ $604.16

3. Using Reciprocal Method

Prime costs250.00$

Overhead cost:

P1196.00$

(10Mhr x $19.60)

P2156.40$

(8 DLhr x $19.55)

Total unit cost of XYZ 602.40$

NOTE THE VARIATION IN FINAL PRODUCT COST DEPENDENT ON METHOD USED