Solve the allocation question with three methods. 1. direct method, 2. step down method. 3. reciprocal...

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Support Departments Plant Information Maintenance Systems Operating Departments Machining Assembly Total $600,000 $116,000 $4

Solve the allocation question with three methods. 1. direct method, 2. step down method. 3. reciprocal method.

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Answer 1

Answer #1

1) direct method of manufacturing overhead costs allocation :

	support departments	operating departments
desciption	plant maintenance	information systems	machining	assembly	total
budgeted manufacturing overhead costs before allocations	$600000	$116000	$400000	$200000	$1316000
allocations :
plant maintenance (2400/6400, 4000/6400)	($600000)		$225000	$375000	$600000
information systems (1600/1800, 200/1800)		($116000)	$103111	$12889	$116000
total overhead	$0	$0	$728111	$587889	$1316000

Department plant maintenance’s cost has been allocated on the basis of budgeted labor-hours:

2400 hours + 4000 hours = 6400 hours.

Allocated to department machining: $600000 × (2400/6400) = $225000
Allocated to department assembly: $600000 × (4000/6400) = $375000

Department information systems’s cost has been allocated on the basis of budgeted computer hours:

1600 hours + 200 hours = 1800 hours

Allocated to department machining: $116000 × (1600/1800) = $103111
Allocated to department assembly: $116000 × (200/1800) = $12889

2) step down method of manufacturing overhead costs allocation :

	support departments	operating departments
desciption	plant maintenance	information systems	machining	assembly	total
budgeted manufacturing overhead costs before allocations	$600000	$116000	$400000	$200000	$1316000
allocations :
plant maintenance (1600/8000, 2400/8000, 4000/8000)	($600000)	$120000	$180000	$300000	$600000
information systems (1600/1800, 200/1800)		($236000)	$209778	$26222	$236000
total overhead	$0	$0	$789778	$526222	$1316000

Allocation of department plant maintenance’s cost:

Allocation ratio:
Department information systems: 1600/(1600 + 2400 + 4000 ) = 1600/8000
Department machining: 2400/(3000 + 9000 + 15,000 ) = 2400/8000
Department assembly: 4000/(3000 + 9000 + 15,000 ) = 4000/8000

Allocated to department information systems: $600000 × (1600/8000 ) = $120000
Allocated to department machining: $600000 × (2400/8000 ) = $180000
Allocated to department assembly: $600000 × (4000/8000 ) = $300000

Allocation of department B’s cost:

Allocation ratio:
Department machining: 1600/(1600 + 200) = 1600/1800
Department assembly: 200/(1600 + 200) = 200/1800

Total cost of department information systems: $116000 + $120000 = $236000

1600 hours + 200 hours = 1800 hours

Allocated to department machining: $236000 × (1600/1800) = $209778
Allocated to department assembly: $236000 × (200/1800) = $26222

3) reciprocal method of manufacturing overhead costs allocation :

	support departments	operating departments
desciption	plant maintenance	information systems	machining	assembly	total
budgetedmanufacturing overhead costs before allocations	$600000	$116000	$400000	$200000	$1316000
allocations :
plant maintenance (20%, 30% and 50%)	($624082 )	$124816	$187225	$312041	$624082
information systems (10%, 80% and 10%)	$24082	($240816)	$192653	$24081	$116000
total overhead	$0	$0	$779878	$536122	$1316000

Let:

toal cost of department palnt maintenance = Y

toal cost of department infomation systems = Z

so equations areas under:

Y = $600000 + 0.10Z —— Eq.1
Z = $116000 + 0.20Y —— Eq.2

Substituting the value of Z in equation 1:

Y = $600000 + 0.10($116000 + 0.20Y)
Y = $600000 + $11600 + 0.02Y
Y – 0.02Y = $600000 + $11600
0.98Y = $611600
Y = $611600/0.98
Y = $624081.63 or $624082 (rounded off to $)

Substituting the value of Y in equation 2:

Z = $116000 + 0.20Y
Z = $116000 + 0.20 ($624082)
Z = $116000 + $124816.40 = $240816.40 or $240816 (rounded off to $)

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