Question

Caro Manufacturing has two production departments, Machining and Assembly, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of August follow:

				Proportion of Services Used by
Department	Direct Costs			Maintenance		Cafeteria		Machining		Assembly
Machining	$	125,000
Assembly		81,000
Maintenance		54,000		—		0.1		0.7		0.2
Cafeteria		38,000		0.7		—		0.2		0.1

Required:

Use the reciprocal method to allocate the service costs. (Matrix algebra is not required.) (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to the nearest whole dollar amounts.)

Answer 1

Ans:

	Cost allocation to:
From	Maintenance	Cafeteria	Machining	Assembly
Service departmental costs	54,000	38,000
Maintenance(0.1/0.7/0.2)	(86,667)	8667	60667	17,333
Cafeteria(0.7/0.2/0.1)	32,667	(46,667)	9333	4667
Total	0	0	70,000	22,000

Working Note:

Total service departmental costs= Direct costs of the service department + cost allocated to the service department

A1(Maintenance) = $54,000+0.7*A2

A2(cafeteria)=$38,000+0.1*A1

Using substitution method, we get

A1(Maintenance)= $54,000+0.7($38,000+0.1*A1)

A1= $54,000+26,600+0.07A1

0.93A1= $80,600

A1= $80,600/0.93

A1= $86,667

Now substituting A1= $86,667 in the equation we get

A2= $38,000+0.1*$86,667

A2= $38,000+ 8667

A2= $46,667