Nevada Company has three producing departments (p1, p2, and p3) for which direct department costs are accumulated. In January, the following indirect costs of operation were incurred.
- Plant manager's salary and office expense- $14,400
- Plant security- 2,400
- Plant nurse's salary and office expense- 3,000
- Plant depreciation- 4,000
- Machine Maintenance- 4,800
- Plant cafeteria cost subsidy- 3,600
- total-32,200
The following additional data have been collected for the three producing departments:
- Number of employees 10 15 5
- Space occupied 2000 5000 3000
- Direct labor hours 1600 4000 750
- Machine hours 4800 8000 3200
a. Group the indirect cost items into cost pools based on the nature of the costs and their common basis for allocation. Identify the most appropriate allocation basis for each cost pool and determine the total January costs in the pool.
b. Allocate the cost pools directly to the three producing departments using the allocation bases selected in requirement (a).
c. How much indirect cost would be allocated to each producing department if Nevada Company were using a plant wide rate based on direct labor hours? Based on machine hours?
d. Comment on the benefits of allocating costs in pools compared with using a plantwide rate.