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This is the amount of total overhead for the Machining Department to allocate to its products using the step-down method beginning with the Maintenance Department. The problem says to use the direct method.
Under the direct method, overhead is allocated only to production departments, not to other service departments. Therefore, Maintenance and Systems departments’ overhead will be allocated only to the Machining and Fabrication departments. The Machining Department is budgeted to receive 50% of the Maintenance Department’s services. But instead of multiplying the costs of the Maintenance Department by 50% to calculate the amount of Maintenance cost to allocate to Machining, we need to remember that the users’ usage totals only 90% (50% + 40%), because nothing is to be allocated from either support department to the other support department. Therefore, the factor to use in allocating Maintenance Department costs to machining is .50/.90, which equals .555556. Similarly, the Machining Department is budgeted to receive 45% of the Systems Department’s services. But instead of multiplying the costs of the Systems department by 45% to get the amount of Systems cost to allocate to Machining, the factor to use in allocating Systems costs to Machining is .45/.95, which equals .473684. The total overhead for the Machining Department to allocate to its products is: $200,000 of its own overhead + $200,000 allocated from Maintenance ($360,000 × .555556) + $45,000 allocated from Systems ($95,000 × .473684), which equals $445,000.
This is 50% of the Maintenance Department's costs of $360,000 plus 45% of the Systems Department's costs of $95,000 plus $200,000 of its own budgeted overhead costs. However, under the direct method, overhead is allocated only to production departments, not to other service departments. The two production departments are Machining and Fabrication. The total usage of Maintenance services by Machining and Fabrication is 90% of the total services provided (50% + 40%). Therefore, the factor to use in allocating Maintenance Department costs to machining is .50 /.90, which equals .555556. The total usage of Systems services by Machining and Fabrication is 95% of the total services provided (45% + 50%). Therefore, the factor to use in allocating Systems costs to Machining is .45 /.95, which equals .473684.