Question Overhead Allocation

Pluto Pasta Co (a division of Neptune Australia) manufactures ready to eat pasta meals. Pluto Pasta has two largely automated production departments: Mixing and Cooking. The Mixing and Cooking departments are supported by three support departments: Repairs & Maintenance (R&M), Information Technology (IT) and Human Resources (HR).

The support costs of the R&M department are allocated to other departments based on the number of machines operating in each of the other departments. In the Mixing production department there are 10 automated mixing machines, the Cooking production department operates using 6 automated cooking machines, and the IT and HR departments have no machines requiring maintenance.

IT department costs are allocated based on the number of computers requiring service in each of the other departments. In the Mixing department there are 10 computers, the Cooking department operates using 20 computers, and the R&M and HR departments have 5 computers each.

HR department costs are allocated based on the number of staff employed in each department. R&M employ 4 staff, IT employ 6, whilst Mixing and Cooking employ 20 staff each.

Manufacturing costs for the year for the Mixing department is $1,900,000 whilst for Cooking it is $2,300,000. The R&M department has budgeted costs of $702,000, IT has budgeted costs of $786,000, and HR has budgeted costs of $525,000.

The following schedule represents the use of the R&M, IT and HR departments services during the year:

One of the service departments (R&M) does not provide any services to the other service departments (IT & HR) and so does not have a reciprocal relationship.

The solution I would propose is that the R&M service department be distributed directly to the Mixing and Cooking production departments.

This will leave only HR and IT remaining with the reciprocal relationship to resolve. However, this will mean that the % weights of service provision for each of those service departments will need to be recalculated following the removal of the % weight provided to R&M (as in the Step method). After doing this the reciprocal method can be solved for by using simultaneous equations between the IT and HR service departments as per the fully worked practice set solution provided in the Tutorial folder in Resources on Interact.

Required: Calculate the total production cost for both the Mixing department and the Cooking department using:

(i) The Direct Method of Overhead Allocation

(ii) The Step Method of Overhead Allocation (Use the method recommended in the text on p. 307 to decide in which order to allocate departments)

(iii) The Reciprocal Method of Overhead Allocation (Students may solve using either Excel or Simultaneous Equation methods)

(iv) Briefly compare and contrast Activity Based Costing (ABC) approaches to Overhead Allocation with traditional methods of allocating overhead such as using department or factory-wide cost driver