llocation of Service Department Costs [LO 3]

Marvin Company has three service departments, S1, S2, and S3, and two production departments, P1 and P2. The following data relate to Marvin’s allocation of service department costs:

Budgeted Costs

Number of Employees

S1

$4,000,000

80

S2

3,000,000

60

S3

2,000,000

30

P1

200

P2

300

Service department costs are allocated by the direct method. The number of employees is used as the allocation base for all service department costs.

Power Electronics manufactures portable power supply units. Power has recently decided to use an activity-based approach to cost its products. Production line setups is a major activity at Power. Next year Power expects to perform 2,000 setups at a total cost of $4,000,000. Power plans to produce 800 units of product EP150, which will require two setups.

How much setup cost will be allocated to each unit of EP150 produced?

Mighty Mint Co. produces a mint syrup used by gum and candy companies. Recently, the company has had excess capacity due to a foreign supplier entering its market. Mighty Mint is currently bidding on a potential order from Quality Candy for 5,000 cases of syrup. The estimated cost of each case is $21, as follows:

Direct material

$7

Direct labor

5

Overhead

9

Total

$21

The predetermined overhead rate is $1.80 per direct labor dollar. This was estimated by dividing estimated annual overhead ($1,080,000) by estimated annual direct labor ($600,000). The $1,080,000 of overhead is composed of $270,000 of variable costs and $810,000 of fixed costs. The largest fixed cost relates to depreciation of plant and equipment.