Question

Comparison of Methods of Allocation

Duweynie Pottery, Inc., is divided into two 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 the number of machine hours and general factory costs on the basis of square footage. No effort is made to separate fixed and variable costs; however, only budgeted costs are allocated. Allocations for the coming year are based on the following data: Use the rounded values for subsequent calculations.

	Support Departments				Operating Divisions
	Power		General Factory		Pottery		Retail
Overhead costs	$150,000		$160,000		$98,000		$56,000
Machine hours	2,000		1,000		6,900		3,100
Square footage	2,000		1,700		4,000		6,000

Round all allocation ratios to four significant digits. Round all allocated amounts to the nearest dollar.

Required:

1. Allocate the support service costs using the direct method.

Allocation Ratios	Pottery	Retail
Proportion of machine hours	fill in the blank 1	fill in the blank 2
Proportion of square footage	fill in the blank 3	fill in the blank 4

Cost Allocations	Pottery	Retail
Power	$fill in the blank 5	$fill in the blank 6
General Factory	fill in the blank 7	fill in the blank 8
Direct costs	fill in the blank 9	fill in the blank 10
	$fill in the blank 11	$fill in the blank 12

2. Allocate the support service costs using the sequential method. The support departments are ranked in order of highest cost to lowest cost. If an amount is zero, enter "0".

Allocation Ratios	Power	General Factory	Pottery	Retail
Machine hours	fill in the blank 13	fill in the blank 14	fill in the blank 15	fill in the blank 16
Square footage	fill in the blank 17	fill in the blank 18	fill in the blank 19	fill in the blank 20

Cost Allocations	Power	General Factory	Pottery	Retail
Direct costs	$fill in the blank 21	$fill in the blank 22	$fill in the blank 23	$fill in the blank 24
General Factory	fill in the blank 25	fill in the blank 26
		fill in the blank 27	fill in the blank 28
		fill in the blank 29		fill in the blank 30
Power	fill in the blank 31		fill in the blank 32
	fill in the blank 33			fill in the blank 34
Cost after allocation	$fill in the blank 35	$fill in the blank 36	$fill in the blank 37	$fill in the blank 38

3. Allocate the support service costs using the reciprocal method. If an amount is zero, enter "0".

Allocation Ratios	Power	General Factory	Pottery	Retail
Machine hours	fill in the blank 39	fill in the blank 40	fill in the blank 41	fill in the blank 42
Square footage	fill in the blank 43	fill in the blank 44	fill in the blank 45	fill in the blank 46

Cost Allocations	Pottery	Retail
General Factory	$fill in the blank 47	$fill in the blank 48
Power	fill in the blank 49	fill in the blank 50
Direct costs	fill in the blank 51	fill in the blank 52
Cost after allocation	$fill in the blank 53	$fill in the blank 54

Answer 1

	Support departments		Operating Divisions
	Power	General	Pottery	Retail
Overhead costs	150000	160000	98000	56000
Machine hrs	2000	1000	6900	3100
Square footage	2000	1700	4000	6000
Direct method
	Operating Divisions
	Pottery	Retail
Overhead costs	98000	56000
Power department	103500	46500
	(150000*6900/(6900+3100)	(150000*3100/(6900+3100)
General dept	64000	96000
	(160000*4000/(4000+6000)	(160000*6000/(4000+6000)
Total	265500	198500
Sequential Method
	Support departments		Operating Divisions
	Power	General	Pottery	Retail
Overhead costs	150000	160000	98000	56000
Allocation of cost of highest cost dept-general
	26,667	-1,60,000	53,333	80,000
	(160000*2000/(4000+6000+2000))		(160000*4000/(4000+6000+2000))	(160000*6000/(4000+6000+2000))
Subtotal	1,76,667	-	1,51,333	1,36,000
Allocation of cost of power dept	-176667	-	1,21,900	54,767
			(176667*6900/(6900+3100))	(176667*3100/(6900+3100))
Total o/h cost			2,73,234	1,90,767