Question

Problem 7.35 Comparison of Methods of Allocation Duweynie Pottery, Inc., is divided into two operating divisions: Pottery and Retail. The com pany allocates Power and General Factory department costs to each operating division Power costs are allocated on the basis of the number of machine hours and general factory costs on the basis of square footage. No effort is made to separate fixed and variable costs; however, only budgeted costs are allocated. Allocations for the coming year are based on the following data: Support Departments Operating Divisions Power General Factory Pottery Retail Overhead costs $150,000 $160,000 $98.000 $56,000 Machine hours 2.000 1,000 6.900 3.100 Square footage 2,000 1,700 4,000 6,000 Round all allocation ratios to four significant digits. Round all allocated amounts to the nearest dollar.

Answer 1

Direct Method
Allocation Ratios	Pottery	Retail
Proportion of Machine Hour	69%	31%
	(69/100)	(31/100)
Proportion of Square Footage	40%	60%
	(4/10)	(6/10)
Cost Allocation	Pottery	Retail
Direct Cost	$98,000	$56,000
General factory	$110,400	$49,600
( 160000*69% & 31%)
Power	$60,000	$90,000
(150000*40% & 60%)
Total Cost	$268,400	$195,600

2. Sequential Method
Allocation Ratios	Power	General Factory	Pottery	Retail
Machine hours	0	0	69%	31%
	0	0	6900/10000	3100/10000
Square Footage	16.67%		33.33%	50.00%
	(2000/12000)	0	(4000/12000)	(6000/12000)
Cost Allocation	Power	General Factory	Pottery	Retail
Cost	$150,000	$160,000	$98,000	$56,000
General factory (16.67%:33.33%:50%)	$26,667	-$160,000	$53,333	$80,000
	$176,667		$151,333	$136,000
Power (69%:31%)	-$176,667	$0	$121,900	$54,766.67
Cost after Allocation		$0	$273,233	$190,767