DSL Company has two manufacturing departments - the Machining Department and the Assembly Department. Each department has a different overhead cost driver - machine hours in the Machining Department and assembly labor hours in the Assembly Department. Different jobs need different amounts of machining and assembly resources. The company allocates Machining Department overhead costs using machine hours and Assembly Department overhead costs using labor hours. Details of the company's budgeted manufacturing overhead costs of $1,120,000 for 2014 are shown below:

The Engineering and Production Control Department supports all the engineering activity in the other departments. The Materials Management Department is responsible for managing and moving materials and components required for different jobs. Each job at the company is different and requires small quantities of unique components to be machined and assembled.

The overhead rate for the Machining Department is based upon 10,000 machine hours. The overhead rate for the Assembly Department is based upon 20,000 direct labor hours.

MANAGEMENT XL122                                                                     SPRING 2014

The departmental costs and support percentages are shown below:

Assume the company has two service departments and their costs are recorded in these departments and are allocated to two production departments. All four departments share the same building. Each service department is an intermediate cost center whose costs are recorded as incurred and then distributed to other cost centers.

Requirements

You have been hired as consultant to the company. Prepare an analysis and letter to the president allocating the overhead costs and determining the total departmental costs and their respective overhead rates based upon the following methods:

1. Direct method
2. Step method
3. Reciprocal method