Refer to the data given in Problem 7.39 for Kevin Ltd.
Kevin Ltd is developing departmental overhead rates based on machine hours for its Moulding Department and direct labour hours for its Assembly Department. The Moulding Department has 20 machines, each of which runs 2000 hours per year. The Assembly Department employs 80 people. Each person in the Assembly Department works 2000 hours per year. The production-related overhead costs distributed to the Moulding and Assembly departments rebadged at $200 and $640,000 respectively. Two support departments, Repairs and Engineering, directly support the two production departments. Moulding and Assembly. These support departments have budgeted costs of $96 000 and $500 000 respectively. The production departments’ overhead rates cannot be determined until the support Departments costs are allocated. The following schedule reflects the use of the Repairs Department’s and Engineering Department’s output by the various departments,
1. (a) Calculate the overhead rates per machine hour for the Moulding Department and per direct labour hour for the Assembly Department. Use the reciprocal services method to allocate support department costs.
(b) Now estimate the overhead cost of the ‘doodad’.
2. Which of the three methods of support department cost allocation results in the most accurate overhead rates and product costs? Why?