Question

Direct Method, Reciprocal Method, Overhead Rates Macalister Corporation is developing departmental overhead rates based on direct labor hours for its two production departments ---Molding and Assembly. The Molding Department employs 20 people, and the Assembly Department employs 80 people. Each person in these two departments works 2,000 hours per year. The production-related overhead costs for the Molding Department are budgeted at $190,000, and the Assembly Department costs are budgeted at $80,000. Two support departments-Engineering and General Factory--directly support the two production departments and have budgeted costs of $216,000 and $370,000, respectively. The production departments' overhead rates cannot be determined until the support departments' costs are property allocated The following schedule reflects the use of the Engineering Department's and General Factory Department's output by the various departments. Engineering General Factory Molding Assembly Engineering hours - 2,000 2,000 8,000 Square feet 120,000 420,000 60,000 For all requirements, round allocation ratios to four significant digits and round allocated costs to the nearest dollar Required: 1. Calculate the overhead rates per direct labor hour for the Molding Department and the Assembly Department using the direct allocation method to charge the production departments for support department cost Round final answers to the nearest cent. Overhead rate per DLH Molding Assembly Previous Check My Work Save and Exit Submit Assignment for Grading All work saved.

Answer 1

Answer is given below with working notes

1. Overhead rate per DLH Molding Assembly $13.921 $1.87 Direct Method Total Support Department General Engineering Factory $216,000 $370,000 -$216,000 Production Department Molding Assembly Department Department $190,000 $80,000 $43,200 $172,800 Overheads Allocation of Engineering (Ratio of 2:8) $270,000 $216,000 -$370,000 $323,750 $46,250 $370,000 Allocation of General Factory (Ratio of 420:60) $0 $0 $556,950 $299,050 $856,000 Total Direct labor hours Molding Department( 20 x 2,000) Assembly Department ( 80 x 2,000) Direct labor hour rate 40,000 160,000 $1.87 $13.92 2. Overhead rate per DLH Molding Assembly $13.35 $2.01 Reciprocal Department Total Support Department General Engineering Factory $216,000 $370,000 -$300,000 $50,000 Production Department Molding Assembly Department Department $190,000 $80,000 $50,000 $200,000 Overheads Allocation of Engineering $270,000 $250,000 Allocation of General Factory $84,000 - $420,000 $294,000 $42,000 $336,000 $0 $534,000 $322,000 $856,000 Total Direct labor hours Molding Department( 20 x 2,000) Assembly Department ( 80 x 2,000) Direct labor hour rate 40,000 $13.35 160,000 $2.01 3. Reasons for difference Direct method ignores the service rendered to service department and directly allocates to production departmen But Reciprocal method consider service rendered to other department and allocates overhead first Arguments for Reciprocal method Service rendered to other service department is considered Realistic absorption rate Accurate product costing working note Engineering Total General Factory 2,000 Molding Assembly Department Department 2,000 8,000 420,000 60,000 16.67% 66.67% 70.00% 10.00% Engineering hours Square feet Engineering hours Square feet 120,000 12,000 600,000 100.00% 100.00% 16.67% 20.00% Simultaneous Equation method E=216,000+20%G G= 370,000 + 16.67%E E= Engineering department cost G=General Factory cost Solving above equation E= 216,000+ 20%(370,000+16.67%E) E= 216,000+74,000+0.03334 E 0.96666E= 280,000 E= 290,000/0.96666 Total Cost E= $300,000 G= $420,000