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, the total overhead costs associated with P1 would include only the allocated maintenance department costs of $80,000 (based on 8,000 standard service hours) and no allocation from the personnel department. Therefore, the total overhead costs associated with P1 would be $80,000 + $36,000 (direct costs) = $116,000. Adding the allocated maintenance department costs for P2 of $40,000 (based on 4,000 standard service hours) would bring the total overhead costs for both producing departments to $156,000. Therefore, the correct answer is B, $125,000, which is the total overhead costs associated with P1 after allocating the Maintenance and Personnel Departments using the direct method.

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