Question

Pottery Inc., is divided into 2 operating divisions: Pottery and Retail. The company allocates Power and General Factory department costs to each operating division. Power costs are allocated on the basis of number of machine hours and general factory costs on the basis of square footage. Allocations for the coming year are based on the following date?

Direct Cost                          $150,000              $160,000              $98,000    $56,000

Machine Hours                                                 1000                       6900                       3100

Square Footage                        2000                                     4000                       6000

1. Calculate the allocation ratios for the department using the direct method in the table provided below.

                                                 Power Department        General Factory Department   Pottery   Retail

Power Department

General Factory Department

2. Using the direct method, allocate the cost of the Power Department and General Factory Department to the Pottery and Retail departments in the table provided below.

     Power Department    General Factory Department   Pottery   Retail

Direct Costs                                        $150,000              $160,000                         $98,000   $56,000

Allocate:

Power Department

General Factory Department

Total after Allocation

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 provided 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 retail departments in the table provided below.

     Power Department    General Factory Department   Pottery   Retail

Direct Costs                                        $150,000              $160,000                         $98,000   $56,000

Allocate:

Total After Allocation

                               

Answer 1

1.

	Power department	General Factory department	Pottery	Retail
Power department			0.69 (6900/10000)	0.31 (3100/10000)
General Factory department			0.4 (4000/10000)	0.6 (6000/10000)

	Power department	General Factory department	Pottery	Retail
Direct cost	$150,000	$160,000	$98,000	$56,000
Allocate:
Power department	(150,000)		103,500 (150,000*0.69)	46,500 (150,000*0.31)
General Factory department		(160,000)	64,000 (160,000*0.4)	96,000 (160,000*0.6)
Total after allocation	$0	$0	$265,500	$198,500

2.

	Power department	General Factory department	Pottery	Retail
Power department		9.09% (1000/11000)	69%(6900/10000)	31%(3100/10000)
General Factory department	16.67%(2000/12000)		33.33%(4000/12000)	50% (6000/12000)

Cost allocation	Pottery	Retail
General Factory department	33.33%(4000/12000)	50% (6000/12000)
Power department	69%(6900/10000)	31%(3100/10000)

	Power department	General Factory department	Pottery	Retail
Direct cost	$150,000	$160,000	$98,000	$56,000
Allocate:
General Factory department	26.672 (160,000*16.67%)	(160,000)	53,328 (160,000*33.33%)	80,000 (160,000*50%)
Power department	(176,672)		121,904 (176,672*69%)	54,768 (176,672*31%)
Total after allocation	$0	$0	$273,232	$190,768