Maurice Tutor
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III. Allocation: Direct and Sequential Methods
Barok Manufacturing produces machine parts on a job-order basis. Most business is obtained through bidding. Most firms competing with Barok bid full cost plus a 20% markup. Recently, with the expectation of gaining more sales, Barok reduced its markup from 25% to 20%. The company operates two service departments and two producing departments. The budgeted costs and the normal activity levels for each department are given below.
Service  Departments         Producing Departments
|
 |
A |
B |
 |
C |
D |
|
Direct overhead costs |
$100,000 |
$200,000 |
 |
$100,000 |
$50,000 |
|
Number of employees |
8 |
7 |
 |
30 |
30 |
|
Maintenance hours |
2,000 |
200 |
 |
6,400 |
1,600 |
|
Machine hours |
— |
— |
 |
10,000 |
1,000 |
|
Labor hours |
— |
— |
 |
1,000 |
10,000 |
The direct costs of Department A are allocated on the basis of employees. The direct costs of Department B are allocated on the basis of maintenance hours. Departmental overhead rates are used to assign costs to products. Department C uses machine hours, and Department D uses labor hours.
The firm is preparing to bid on a job (Job K) that requires three machine hours per unit pro- duced in Department C and no time in Department D. The expected prime costs per unit are $67.
Required:
1.      Allocate the service costs to the producing departments by using the direct method.
2.      What will the bid be for Job K if the direct method of allocation is used?
3.      Allocate the service costs to the producing departments by using the sequential method.
4.      What will the bid be for Job K if the sequential method is used?
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