Figure 7-6 Oaks Company has two support departments, Maintenance Department (MD) and Personnel Department (PD), and two producing departments, P1 and P2.The Maintenance Department costs of $30,000 are allocated on the basis of standard service used.The Personnel Department costs of $4,500 are allocated on the basis of number of employees.The direct costs of Departments P1 and P2 are $9,000 and $15,000, respectively.
Data on standard service hours and number of employees are as follows:

- Refer to Figure 7-6.What are the total overhead costs associated with P2 after allocating the Maintenance and Personnel Departments using the direct method?

Question

Figure 7-6 Oaks Company has two support departments, Maintenance Department (MD) and Personnel Department (PD), and two producing departments, P1 and P2.The Maintenance Department costs of $30,000 are allocated on the basis of standard service used.The Personnel Department costs of $4,500 are allocated on the basis of number of employees.The direct costs of Departments P1 and P2 are $9,000 and $15,000, respectively.
Data on standard service hours and number of employees are as follows:

- Refer to Figure 7-6.What are the total overhead costs associated with P2 after allocating the Maintenance and Personnel Departments using the direct method?

Quizplus · Accepted Answer

Using the direct method, we only allocate the overhead costs of the support departments based on the direct usage of each producing department.

Total overhead costs associated with P2 = Direct costs of P2 + Allocated overhead costs from support departments

Allocated overhead costs from Maintenance Department = $30,000 x (2,000 standard service hours for P1 + 3,000 standard service hours for P2)/(2,000 standard service hours for P1 + 4,000 standard service hours for P2) = $15,000

Allocated overhead costs from Personnel Department = $4,500 x (15 employees in P2)/(25 employees in P1 and P2 combined) = $2,700

Total overhead costs associated with P2 = $15,000 + $2,700 + $15,000 = $32,700

Therefore, the best choice is D ($27,250 is incorrect as it only includes the direct costs of P2 without the allocated overhead costs)

Figure 7-6 Oaks Company Has Two Support Departments, Maintenance Department