Question

Caro Manufacturing has two production departments, Machining and Assembly, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of August follow:

				Proportion of Services Used by
Department	Direct Costs			Maintenance		Cafeteria		Machining		Assembly
Machining	$	120,000
Assembly		69,000
Maintenance		55,000		—		0.3		0.5		0.2
Cafeteria		35,000		0.6		—		0.2		0.2

Required:

Use the reciprocal method to allocate the service costs. (Matrix algebra is not required.)

Answer 1

Solution:

Service department cost = Direct Cost + Allocated Cost

Maintenance Department Cost = $55,000 + 0.60* Cafeteria Cost

Cafeteria Department Cost = $35,000 + 0.30* Maintenance Cost

Cafeteria Department Cost = $35,000 + 0.30 *($55,000 + 0.60* Cafeteria Cost)

Cafeteria Department Cost = $35,000 + $16,500 + 0.18* Cafeteria Cost)

Cafeteria Cost = $51/500 / 0.82 = $62,805

Maintenance Cost = $55,000 + 0.60*$62,805 = $92,683

From	Service Department Cost Allocation - Reciprocal Method
	Service Department		Production Departments
	Maintenance	Cafeteria	Machining	Assembly
Direct charges of department	$55,000	$35,000	$120,000	$69,000
Maintenance (0.3:0.5:0.2)	-$92,683	$27,805	$46,342	$18,537
Cafeteria (0.6:0.2:0.2)	$37,683	-$62,805	$12,561	$12,561
Total	$0	$0	$178,902	$100,098