Gravity Company has two support departments, Maintenance Department (MD) and Personnel Department (PD), and two producing departments, P1 and P2. The Maintenance Department costs of $120,000 are allocated on the basis of standard service hours used. The Personnel Department costs of $18,000 are allocated on the basis of number of employees. The direct costs of Departments P1 and P2 are $36,000 and $60,000, respectively. Data on standard service hours and number of employees are as follows:
What are the total overhead costs associated with P1 after allocating the Maintenance and Personnel Departments using the direct method?

Question

Gravity Company has two support departments, Maintenance Department (MD) and Personnel Department (PD), and two producing departments, P1 and P2. The Maintenance Department costs of $120,000 are allocated on the basis of standard service hours used. The Personnel Department costs of $18,000 are allocated on the basis of number of employees. The direct costs of Departments P1 and P2 are $36,000 and $60,000, respectively. Data on standard service hours and number of employees are as follows:
 What are the total overhead costs associated with P1 after allocating the Maintenance and Personnel Departments using the direct method?

Quizplus · Accepted Answer

Using the direct method, we allocate the costs of the support departments based on the direct usage of each producing department. The total allocated maintenance costs for P1 and P2 are $48,000 and $72,000, respectively, based on the standard service hours used. The total allocated personnel costs for P1 and P2 are $6,000 and $12,000, respectively, based on the number of employees. Therefore, the total overhead costs associated with P1 is $36,000 (direct costs) + $48,000 (allocated maintenance costs) + $6,000 (allocated personnel costs) = $90,000. Adding the direct costs of P1, the total cost of P1 is $126,000, which is closest to answer B, $125,000.

Gravity Company Has Two Support Departments, Maintenance Department (MD) and Personnel