Question

1. Support department cost allocation—reciprocal services method

Davis Snowflake & Co. produces Christmas stockings in its Cutting and Sewing departments. The Maintenance and Security departments support the production of the stockings. Costs from the Maintenance Department are allocated based on machine hours, and costs from the Security Department are allocated based on asset value. Information about each department is provided in the following table:

	Maintenance Department	Security Department	Cutting Department	Sewing Department
Machine hours	800	2,000	6,400	11,600
Asset value	$2,000	$1,460	$2,000	$6,000
Department cost	$38,160	$16,960	$65,000	$82,000

Determine the total cost of each production department after allocating all support department costs to the production departments using the reciprocal services method.

	Cutting Department		Sewing Department
Production departmentsʼ total costs	$		$

2. Support department cost allocation—direct method

Becker Tabletops has two support departments (Janitorial and Cafeteria) and two production departments (Cutting and Assembly). Relevant details for these departments are as follows:

Support Department		Cost Driver
Janitorial Department		Square footage to be serviced
Cafeteria Department		Number of employees

	Janitorial Department	Cafeteria Department	Cutting Department	Assembly Department
Department costs	$300,000	$200,000	$1,490,000	$700,000
Square feet	42	4,600	800	3,200
Number of employees	8	3	32	8

Allocate the support department costs to the production departments using the direct method.

	Cutting Department		Assembly Department
Janitorial Department cost allocation	$		$
Cafeteria Department cost allocation	$		$

Answer 1

Solution Question #1 Allocation of support department costs to the production departments using the reciprocal services method Under reciprocal services method, interdepartmental service cost from one support department to another support department is allocated. Under this method, interdepartmental service cost from another support department is allocated using algebraic equation. Lets assume that the total cost (including the cost from other support department), of Maintenance Department and Security Department is 'X' & 'Y' respectively. Now, X = $38,160 + {2,000/(2,000 + 2,000 + 6,000)} Y = $38,160 +0.2Y Y = $16,960 + {2,000 / (2,000 + 6,400 + 11,600)}X = $16,960 +0.1X Now substituting the value of Y in first equation, $38,160 +0.2 ($16,960 +0.1%) $38,160 + $3,392 +0.02% $41,552 /(1-0.02) $42,400 Now substituting the value of X in second equation, $16,960 +0.1 x $42,400 = $21,200 Support Departments Production Departments Maintenance Security Cutting Sewing $38,160 $16,960|| $65,000 $82,000 Direct costs (a) Allocations: Maintenance ($42,400) $4,240 $13,568 $24,592 $42,400 x 2,000/ (2,000+6,400+11,600) $42,400 x 6,400/ (2,000+6,400+11,600)| $42,400 x 11,600/ (2,000+6,400+11,600) Security $4,240 ($21,200) $4,240 $12,720 $21,200 x 2,000/ (2,000+2,000+6,000) $21,200 x 2,000/ (2,000+2,000+6,000)| $21,200 x 6,000/ (2,000+2,000+6,000) Total Support Dept. cost allocated (b) $17,808 $37,312 Total production costs after allcoation (a+b) $82,808 $119,312 | Cutting Department $82,808 Sewing Department $119,312 Production departments total costs

Question #2 Allocation of support department costs to the production departments using the direct method Under direct method, Support department costs is directly allocated to the production departments using the allocation base. In this method, no cost from one support department to another support department is allocated. This method is the simple method and ignores the services provided by one support department to another support department. Support Departments Janitorial Cafeteria $300,000 $200,000 Production Departments Cutting Assembly $1,490,000 $700,000 Direct costs (a) Allocations: Janitorial ($300,000) $60,000 $300,000 x 800/(800+3,200) $160,000 $200,000 x 32 /(32 +8) $240,000 $300,000 x 3,200/(800+3,200) $40,000 $200,000 x 8/(32 + 8) Cafeteria ($200,000) Total Support Dept. cost allocated (b) $220,000 $280,000 Total production costs after allcoation (a + b) $0.00 $1,710,000 $980,000 Janitorial Department cost allocation Cutting Department | $60,000 $160,000 Assembly Department $240,000 $40,000 Cafeteria Department cost allocation