Ronil John Garganian MBAT1

Geraldine Alisbo MBAT 1

CLASS CASE 3: STAR ENGINEERING COMPANY

1. Complete the overhead costs distribution sheet.

STAR ENGINEERING COMPANY

OVERHEAD DISTRIBUTION SHEET

PRODUCTION DEPARTMENT SERVICE DEPARTMENT

A. Overhead Allocation Basis Machining Fabrication Assembly Painting Stores Maintenance Work Office Totals
Indirect Labor and Supervision Exhibit 1 33,000.00 22,000.00 11,000.00 7,000.00 44,000.00 32,700.00 149,700.00
Indirect Materials and Supplies Exhibit 1 2,200.00 1,100.00 3,300.00 3,400.00 2,800.00 12,800.00
Factory Rent Area (sq. m) 45,500.00 38,500.00 30,800.00 22,400.00 15,400.00 7,700.00 7,700.00 168,000.00
Depreciation of Plant and Machinery Book Value 22,000.00 11,000.00 5,500.00 2,200.00 1,100.00 1,650.00 550.00 44,000.00
Building Rates and Taxes Area (sq. m) 650.00 550.00 440.00 320.00 220.00 110.00 110.00 2,400.00
Welfare Expenses Direct & Indirect Labor 9,460.00 4,840.00 2,420.00 1,240.00 880.00 654.00 19,494.00
Power House Power Rating 40,000.00 20,000.00 2,000.00 4,000.00 - 366.00 2,220.00 68,586.00
Works Office Salaries and Expenses Exhibit 1 130,260.00 130,260.00
Miscellaneous Stores Department Expenses Exhibit 1 1,190.00 1,190.00
Total Overhead Allocation 152,810.00 97,990.00 55,460.00 40,560.00 62,790.00 45,980.00 140,840.00 596,430.00
B. Reallocation of Service Department Costs:
Store Department 33,893.18 16,946.59 8,684.07 4,476.16 (64,000.00) -
Maintenance Department 24,200.00 12,100.00 6,050.00 2,420.00 1,210.00 (45,980.00) -
Work Office Department 67,200.00 24,640.00 33,600.00 15,400.00 (140,840.00) -
Total Reallocated Costs 125,293.18 53,686.59 48,334.07 22,296.16 (62,790.00) (45,980.00) (140,840.00) -

TOTAL PRODUCTION COSTS 278,103.18 151,676.59 103,794.07 62,856.16 - - - 596,430.00

Basis for allocating service department costs are Direct and Indirect Materials for Store Department, Book Value of the Plant and Machinery for
Maintenance Department and Direct Labor Hours for Work Office Department. All allocation is rounded in the nearest cents.
2. Calculate the overhead costs (per direct labor hour) for each of the four producing departments. This should include share of the service department’s
cost.
STAR ENGINEERING COMPANY
OVERHEAD DISTRIBUTION SHEET

PRODUCTION DEPARTMENT SERVICE DEPARTMENT

Basis Machining Fabrication Assembly Painting Stores Maintenance Work Office Totals
Total Overhead Allocation 152,810.00 97,990.00 55,460.00 40,560.00 62,790.00 45,980.00 140,840.00 596,430.00
Reallocation of Service Department Costs:
Store Department 33,893.18 16,946.59 8,684.07 4,476.16 (64,000.00) -
Maintenance Department 24,200.00 12,100.00 6,050.00 2,420.00 1,210.00 (45,980.00) -
Work Office Department 67,200.00 24,640.00 33,600.00 15,400.00 (140,840.00) -
Total Reallocated Costs 125,293.18 53,686.59 48,334.07 22,296.16 (62,790.00) (45,980.00) (140,840.00) -

Total Production Costs 278,103.18 151,676.59 103,794.07 62,856.16 - - - 596,430.00

Actual Direct Labor Hours 120,000.00 44,000.00 60,000.00 27,500.00
OVERHEAD RATE PER DIRECT LABOR HOURS 2.32 3.45 1.73 2.29 - - - -

3. Do you agree with:

a. The procedures adopted by the company for the distribution of overhead costs?

The identified cost drivers per manufacturing process provides a reasonable distribution of overhead costs. This way it would be easier for the
management to identify at what specific process overhead is largely incurred and may possibly identify means of minimizing incurrence without
prejudice to the quality of products produce. Hence, we agree with the cost distribution pattern used by Star Engineering Company.

b. The choice of the base for overhead absorption, i.e., labor hour rate?

Taking the learnings in Activity-Based Costing, it is discouraged to use broad averaging when the company do cost allocation purposely as it will
mislead management of what specific process really spends much overhead costs. In this case, it would also be proper to use appropriate cost
drivers in allocating overhead absorption to reflect applicable cost correctly and accurately per department or process.
4. Job No. 879 was expected to be cleared by Inspection Department in the first week of May. The actual materials cost applicable to job No. 879 was
$487.92. Labor time spent on the job was estimated to be 50 hours in Machining, 40 hours in Fabrication, and 20 hours each in Assembly and Painting
Departments, totaling to $460.10. Calculate the total cost of this job including overhead costs.

Direct Materials $ 487.92

Direct Labor 460.10
Factory Overhead:
Machining (50 x $2.32) $ 115.88
Fabrication (40 x $3.45) 137.89
Assembly (20 x $1.73) 34.60
Painting (20 x $2.29) 45.71 334.08
Total Production Cost for Job No. 879 1,282.10

*Difference is due to rounding-off

5. If job No. 879 us a cost-plus-fixed fee (CPFF) contract with the government, fixed fee being $200, what would be the total charges recoverable from
the client?

Total Production Cost for Job No. 879 1,282.10

Fixed Cost 200.00
Total Recoverable Cost 1,482.10

*Difference is due to rounding-off

6. Evaluate the cost accounting system adopted by the accountant and suggest improvements.

The rational allocation of the accountant of Star Engineering Company leads to a more detailed information as regards the individual assigned and
absorbed costs per process or department. It facilitates the management informed decision-making should in the future it may introduce any
improvements in the existing manufacturing process.

On the other hand, the use of direct labor hours for broadly distributing Service Department overhead costs somehow pose a threat for improper cost
absorption. Deliberately, it charged the Production Department without further investigating whether it would create an accurate allocation. Hence, it is
suggested that should process or department cost drivers are available, the accountant must use the same to charge applicable costs appropriately and
correctly to the receiving department.