Question

University Printers has two service departments (Maintenance and Personnel) and two operating departments (Printing and Developing). Management has decided to allocate maintenance costs on the basis of machine-hours in each department and personnel costs on the basis of labor-hours worked by the employees in each.

The following data appear in the company records for the current period:

	Maintenance			Personnel			Printing			Developing
Machine-hours		−			481			703			2,516
Labor-hours		432			−			360			1,608
Department direct costs	$	11,000		$	23,000		$	26,000		$	23,000

Required:

Allocate the service department costs using the reciprocal method. (Matrix algebra is not required because there are only two service departments.) (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.)

From: Maintenance Personnel Printing Developing

Service dept. costs 11,000 23,000 0 0

Maintenance

Personnel

total:

Answer 1

Solution:

Service department cost = Direct Cost + Allocated Cost

Maintenance Department Cost = $11,000 + [432 / (432+360+1608)]* Personnel Cost

= $11,000 + 0.18*Personnel Cost

Personnel Department Cost = $23,000 + [481 / (481+703+2516)]* Maintenance Cost

= $23,000 + 0.13 * Maintenance Cost

Personnel Cost = $23,000 + 0.13 ($11,000 + 0.18*Personnel Cost)

Personnel Cost = $23,000 + $1,430 + 0.0234*Personnel Cost

Personnel Cost = $24,430 / 0.9766 = $25,015

Maintenance Cost = $11,000 + 0.18*$25,015 = $15,503

From	Service Department Cost Allocation - Reciprocal Method
	Service Department		Production Departments
	Maintenance	Personnel	Printing	Developing
Direct charges of department	$11,000	$23,000	$26,000	$23,000
Maintenance (481:703:2516)	-$15,503	$2,015	$2,946	$10,542
Personnel (432:360:1608)	$4,503	-$25,015	$3,752	$16,760
Total	$0	$0	$32,698	$50,302