Overhead Allocation (20 marks)

Pluto Pasta Co (a division of Neptune Australia) manufactures ready to eat pasta meals. Pluto Pasta has two largely automated production departments: Mixing and Cooking. The Mixing and Cooking departments are supported by three support departments: Repairs & Maintenance (R&M), Information Technology (IT) and Human Resources (HR).

The support costs of the R&M department are allocated to other departments based on the number of machines operating in each of the other departments. In the Mixing production department there are 10 automated mixing machines, the Cooking production department operates using 6 automated cooking machines, and the IT and HR departments have no machines requiring maintenance.

IT department costs are allocated based on the number of computers requiring service in each of the other departments. In the Mixing department there are 10 computers, the Cooking department operates using 20 computers, and the R&M and HR departments have 5 computers each.

HR department costs are allocated based on the number of staff employed in each department. R&M employ 4 staff, IT employ 6, whilst Mixing and Cooking employ 20 staff each.

Manufacturing costs for the year for the Mixing department is $1,900,000 whilst for Cooking it is $2,300,000. The R&M department has budgeted costs of $702,000, IT has budgeted costs of $786,000, and HR has budgeted costs of $525,000.

The following schedule represents the use of the R&M, IT and HR departments services during the year:

	User of Service
Provider of Service	R&M	IT	HR	Mixing	Cooking
R&M (No. of Machines)	-	0	0	10	6
IT (No. of Computers)	5	-	5	10	20
HR (No. of Staff)	4	6	-	20	20

Required:

Calculate the total production cost for both the Mixing department and the Cooking department using:

(i) The Direct Method of Overhead Allocation (3 marks)

(ii) The Step Method of Overhead Allocation (5 marks)

(iii) The Reciprocal Method of Overhead Allocation (7 marks)

(iv) Briefly compare and contrast Activity Based Costing (ABC) approaches to Overhead Allocation with traditional methods of allocating overhead such as using department or factory-wide cost drivers (approx.150 words) (5 marks)