Question

Pott Inc. is divided into 2 operating divisions: Pottery & Retail. The company allocates Power & 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. Allocation for the coming year are based on the following data:

	Support Departments		Operating Divisions
	Power Department	General factory Department	Pottery	Retail
Direct costs	$150,000	$160,000	$98,000	$56,000
Normal Activity:
Machine Hours	-	1000	6,900	3,100
Square Footage	2000	-	4000	6,000

1. Calculate the allocation ratios for the departments using the direct method.

2. Using the direct method, allocate the cost o the Power Department and General Factory department to the Pottery and Retail departments.

3.Determine the support department to allocate first, by ranking the support departments in order of the percentage of service provided to the other support department.

4. Develop a table with the allocation ratios for the departments using the sequential (step) method showing the support department first that provides the greater service to the other support department.

5. Using the sequential method, allocate the costs of the Power Department and General Factory Department to the pottery and retain departments.

Answer 1

Answer with working notes is given below

Ratio 1 Allocation ratios for Power Dept Pottery Department Retail Department Total Machine hours Machine hours 6,900 3,100 10,000 0.69 0.31 Ratio Square Allocation ratios for General factory Dept | Footage Pottery Department 4,000 Retail Department 6,000 Total Square footage 10,000 0.40 0.60 2 Direct Method Operating Divisions Support Departments General Power Factory $150,000 $160,000 Pottery Retail $98,000 $56,000 $103,500 $46,500 Departmental costs before allocations Allocation Power Department Ratio of 0.69:0.31 General Factory Department Ratio of 0.40:0.60 Total Overheads $64,000 $96,000 $265,500 $198,500 Operating Divisions Pottery Retail Total Support Departments General Power Factory 1,000 2,000 6,900 4,000 3,100 6,000 11,000 12,000 Machine hours Square footage % of Service provided Power Department General factory Department 9.09% 62.73% 33.33% 28.18% 50.00% 100.00% 100.00% 16.67% General factory department is allocated first since it provides higher rate of service to Power department 4 Ratio of allocation for step method Ratio Allocation ratios for General factory Dept Power Department Pottery Department Retail Department Total Square footage Square Footage 2,000 4,000 6,000 12,000 0.17 0.33 0.50 Ratio Allocation ratios for Power Dept Pottery Department Retail Department Total Machine hours Machine hours 6,900 3,100 10,000 0.69 0.31 5 Sequential method Operating Divisions Support Departments | General Power Factory $150,000 $160,000 Retail Pottery $98,000 $56,000 $26,667 $160,000 $53,333 $80,000 Departmental costs before allocations Allocation General Factory Department Ratio of 0.17:0.33:0.50 Power Department Ratio of 0.69:0.31 Total Overheads -$176,667 $121,900 $54,767 $273,233 $190,767