Problem - Assume that the Pennington Group, a manufacturer of fine casual outdoor furniture, allocates Human Resources Department costs to the producing departments (cutting and welding) based on the number of employees; Facilities Department costs are allocated based on the amount of square footage occupied. Direct department costs, labor hours, and square footage data for the four departments for October are as follows:
|
|
Human resources
|
facilities
|
cutting
|
welding
|
|
Direct department overhead costs
|
60,000
|
150,000
|
800,000
|
370,000
|
|
Number of employees
|
5
|
5
|
40
|
60
|
|
Number of direct labor hours
|
-
|
-
|
8,000
|
10,000
|
|
Amount of square footage
|
10,000
|
3,000
|
100,000
|
50,000
|
Assume that two jobs, A1 and A2 were completed during October and that each job had direct materials costs of $1,200. Job A1 used 80 direct labor hours in the Cutting Department and 20 direct labor hours in the Welding Department. The direct labor rate is $50 in both departments.
a. Find the cost of each job using a plantwide rate based on direct labor hours.
b. Find the cost of each job using department rates with direct service department cost allocation.
c. Find the cost of each job using department rates with step service department cost allocation.
d. Explain the differences in the costs computed in requirements (a)-(c) for each job. Which costing method is better for product pricing and profitability analysis?