Question

Alliance Manufacturing Company has two support departments, Maintenance Department and Personnel Department, and two producing departments, X and Y. The Maintenance Department costs of $90,000 are allocated on the basis of standard service hours used. The Personnel Department costs of $13,500 are allocated on the basis of number of employees. The direct costs of Departments X and Y are $27,000 and $45,000, respectively.

Data on standard service hours and number of employees are as follows:

Maint. Person. Dept. Dept.
Dept. Dept. X Y
Standard service hours used 200 150 1,200 600
Number of employees 25 50    75 75
Direct labor hours 250 250 1,000 500

Predetermined overhead rates for Departments X and Y, respectively, are based on direct labor hours. What is the overhead rate for Department X assuming the direct method is used?

a. $27.00
b. $81.00
c. $46.88
d. $93.75

Answer 1

Answer: d. $93.75

Explanation:

First find the total cost of Department X:

= Direct cost + Maintenance cost + Personnel costs

Maintenance cost for Dep. X:

= Standard hours for Maintenance / Total hours * Maintenance costs

= 1,200 / (1,200 + 600) * 90,000

= $60,000

Personnel costs:

= Number of employees in X / Total employees * Personnel costs

= 75 / (75 + 75) * 13,500

= $6,750

Total cost:

= 27,000 + 60,000 + 6,750

= $93,750

Predetermined overhead rates:

= Cost / Direct labor hours

= 93,750 / 1,000 hours

= $93.75