Question

Midland Resources has two production departments (Fabrication and Assembly) and three service departments (Engineering, Administration, and...

Midland Resources has two production departments (Fabrication and Assembly) and three service departments (Engineering, Administration, and Maintenance). During July, the following costs and service department usage ratios were recorded:

Supplying Department Using Department
Engineering Administration Maintenance Fabrication Assembly
Engineering 0 60 % 0 20 % 20 %
Administration 15 % 0 10 % 50 % 25 %
Maintenance 0 30 % 0 15 % 55 %
Direct cost $ 54,000 $ 304,600 $ 50,000 $ 260,000 $ 90,000

  
Required:

Allocate the service department costs to the two operating departments using the reciprocal method. (Do not round intermediate calculations.)

Allocated to:
Costs Fabrication Assembly
Engineering
Administration
Maintenance
Total
0 0
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Answer #1

Solution:

Service department cost = Direct cost + Allocated costs

Engineering = $54,000 + 15% of administration

Administration = $304,600 + 60% of engineering + 30% of maintenance

Maintenance = $50,000 + 10% of administration

Administration = $304,600 + 60% ($54,000 + 15% of administration) + 30% ($50,000 + 10% of adminstration

Administration = $304,600 + $32,400 + 0.09 Administration + $15,000 + 0.03 Administration

Administration = $352,000 / 0.88 = $400,000

Engineering = $54,000 + 15% of $400,000 = $114,000

Maintenance = $50,000 + 10% of $400,000 = $90,000

Allocated to:
Costs Fabrication Assembly
Engineering $114,000.00 $22,800.00 $22,800.00
Administration $400,000.00 $200,000.00 $100,000.00
Maintenance $90,000.00 $13,500.00 $49,500.00
Total $236,300.00 $172,300.00
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