XYZ is a business with two production departments and one se

XYZ is a business with two production departments and one service department Table 1 sets out the indirect costs incurred by the business on behalf of all departments because there is insufficient information to permit allocation of costs as a whole. Table 2 sets out relevant information about each department which will be used in the process of determining an overhead cost rate Table1 Indirect costs incurred by the business Cost Item Total cost this month Indirect materials Indirect labour Rent Machine insurance Depreciation Total 36,000 40,000 1,000 1,600 2,000 80,600 Table 2 Information about each department Assembly|Finishing Maintenance Direct materials used for 400,000 500,000 Not applicable roduction Number of emplovees Floor area Value of machiner Number of direct labour hours 55.000 worked on production 25 300 sa ft 600 sg ft 300 sa ft 20,000 30,000 50,000 64,000 Not applicable The maintenance department provides service in proportion to the machinery used in each department.

Solution

Solution:-

Step 1:- Allocation of indirect costs to production and service department:-

Direct material used

(4:5:0)

Number of empoyees

(10:25:5)

Floor area

(3:6:3)

Value of machinery

(3:5:2)

Value of machinery

(3:5:2)

Step 2:- Allocation of service department cost to production department:-

Step 3:- Calculation of overhead recovery rate:-

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Cost item	Total	Basis	Assembly	Finishing	Maintenance
Indirect materials	36,000	Direct material used (4:5:0)	16,000	20,000	0
Indirect labor	40,000	Number of empoyees (10:25:5)	10,000	25,000	5,000
Rent	1,000	Floor area (3:6:3)	250	500	250
Machine insurance	1,600	Value of machinery (3:5:2)	480	800	320
Depreciation	2,000	Value of machinery (3:5:2)	600	1,000	400
Total indirect cost	80,600		27,330	47,300	5,970