Question

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	8,400	9,600
Asset value	$2,000	$1,430	$1,500	$6,500
Department cost	$41,040	$18,240	$61,000	$85,000

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	$		$

Answer 1

Solution

Determining allocation basis

Maintenance Department

Department	Mach Hrs	% of total
Main.	-
Security	2,000	10%
cutting	8,400	42%
Sewing	9,600	48%
Total	20,000	100%

Security Department

Department	asset Value	% of total
Main.	$2,000	20%
Security	-	-
cutting	$1,500	15%
Sewing	$6,500	65%
Total	$10,000	100%

Setting of equation

X be the maintenance cost and Y be the security cost

X = $41,040 + .20Y

Y = $18,240 + .01 X = $18,240 + .10($41,040+.20Y)

Y= $18,240 +$4,104 +.02Y

y = $22,800

Total of security dept is $22,800

Total cost of main dept is $41,040 + .20($22,800) = $45,600

Total cost of cutting dept = $61,000+42% of $45,600 + 15 % of $22,800 = $61,000+$19,152+$3,420 = $83,572

Total cost of sewing dept =$85,000 + 48% of $45,600 + 65% of $22,800 = $85000+$21,888+$14,820 = $121,708

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