Hotchkiss Company has two support departments, Maintenance Department (MD) and Personnel Department (PD), and two producing departments, P1 and P2. The Maintenance Department costs of $90,000 are allocated on the basis of standard service hours used. The Personnel Department costs of $9,000 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:
Maint. Dept.
Person. Dept.
Dept. P1
Dept.
P2
Standard service hours used 400 200 1,200 600
Number of employees 20 40 180 180
Direct labor hours 200 200 1,000 1,000
What are the total overhead costs associated with P2 after allocating the Maintenance and Personnel Departments using the direct method?

Question

Quizplus · Accepted Answer

Using the direct method, we only allocate the costs of the support departments based on the usage of the producing departments. Therefore, the allocation of Maintenance Department costs to P2 is $30,000 [(600/2,400) * $90,000] and the allocation of Personnel Department costs to P2 is $2,250 [(180/360) * $9,000]. 
The total overhead costs associated with P2 are the sum of the direct costs and the allocated support department costs: 
$60,000 (direct costs of P2) + $30,000 (allocated Maintenance Department costs for P2) + $2,250 (allocated Personnel Department costs for P2) = $92,250. 
Therefore, the best choice is C.

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