Department a requires 24 hours of help per month cost

Department A requires 24 hours of help per month – Cost = $1920
 Department B requires 57 hours of help per month – Cost = $4560
 This will allow Department B to understand the economic implications of its usage of IT support and
control this usage
3. Allocating Overhead costs in Process Costing
a) A Plantwide Overhead Rate
 All overheads are placed in one large cost pool (not disaggregated by department)
 A single cost driver is used to allocate overheads to products (one that is common to all products)
b) Departmental Rates
 Overheads are allocated to departments based on departments usage of overhead costs
 Separate cost driver used for each department to allocate overheads to products

The difference is the cost driver and type of cost pool used
Total IT department costs $400,000
Total hours spent helping 5000
Cost $80 per hour

Plant-Wide Rate – a plant-wide rate is a single overhead rate that is calculated for the entire production plant
 One cost pool – all overhead costs included within it
Three Steps:
1. Identify the overhead cost driver
2. Calculate the overhead rate per unit of cost driver
3. Apply the manufacturing overhead cost to the product based on the predetermined overhead rate and the
product’s actual consumption of the cost driver
Step 2 – Predetermined Overhead Rate:
Step 3:
Lecture Illustration:
Product XYZ is produced in the two production departments (P1 and P2)
- Product XYZ’s prime costs is $250 per unit
- Production of XYZ requires 4 DLHrs in P1 and 15 DLHrs in P2
Calculate the unit manufacturing cost of XYZ:
Unit cost calculation for product XYZ:
Prime costs: $250
Overhead Cost: $348.27 (4 + 15DLHrs x $18.33) – applied OH
Total Unit Cost = $598.27

Departmental Rates – departmental rates recognise that overheads in each department may be driven by different
cost drivers
 For example: paint department might be labour intensive (cost driver = direct labour hours), and the
assembly department might be machine intensive (cost driver = machine hours)
Two Stage Allocation for Department Overhead Rates:
Stage 1 – overhead costs are assigned to production departments (separate cost pool for each department)
 Step 1: overhead costs are allocated to all departments
 Step 2: support departments costs are reassigned to overhead cost pools in the production departments
Stage 2 – overhead costs are applied to products
 Manufacturing overhead rates are calculated for each production departments
Stage 1 – allocating support department costs
 Informs user departments of the cost of the services that they are using to assist them with planning and control
of that usage
Allocation Methods Include:
Direct:
support departments costs are allocated directly to production departments
 Under this method, ignore the support each support department provides to another support department
Step-Down:
partially recognises the services provided by one support department to another
 First allocate costs of the support department that serves the largest number of other support departments
or follow what the question says
 If there is a tie