Question 3 (25 marks)

Welshpool Engineering has two production departments and two support departments. Budgeted data for the year follow. The company does not separate fixed and variable costs.

	Support Departments		Production Departments
	Maintenance	Power	Drilling	Assembly
Overhead costs	$160,000	$200,000	$81,500	$45,000
Machine hours	-	11,250	15,000	3,750
Kilowatt-hours	20,000	5,000	18,000	162,000

The maintenance department costs are allocated based on machine hours and power department costs are allocated based on kilowatt hours.

Required:

1. Determine the total overhead costs for each of the production department, after allocation of support department costs, using each of the following allocation methods:

1. Direct method:

2. Ratio	Maintenance	Power	Drilling	Assembly
   Allocation of costs:
   Overhead costs	$160,000	$200,000	$81,500	$45,000

   b. Step down(sequential) method. (Show your working to determine the ranking of the support departments)

   (7 marks)

   Ratio	Maintenance	Power	Drilling	Assembly
   Ranking of Support department:
   Allocation of costs:
   Overhead costs	$160,000	$200,000	$81,500	$45,000

3. Reciprocal method

4. (8 marks)

   Ratio	Maintenance	Power	Drilling	Assembly
   Allocation of costs:
   Overhead costs	$160,000	$200,000	$81,500	$45,000

   2. Which method would the production manager of the Assembly Department prefer and why? Which method most accurately allocates support department costs and why?

   (5 marks)