Question

Problem 7-35 Departmental Cost Allocation (LO 7-3) 

Logan Products has two production departments-assembly and finishing. These are supported by two service departments-sourcing (purchasing and handling of materials and human resources) and operations (work scheduling, supervision, and inspection). Logan has the following labor hours devoted by each of the service departments to the other departments. 

The costs incurred in the plant are as follows: 

Required: 

Use four decimal places (e.g. 33.3333%) in your calculation of percentages

 1. What are the costs allocated to the two production departments using (a) the direct method, (b) the step method, when the sourcing department that provides the greatest percentage of services to other service departments goes first), and (c) the reciprocal method?

 2. What are the total costs in the production departments after allocation? (For all requirements, do not round intermediate calculations. Round your final answer to nearest whole dollar amount.)

Answer 1

Direct Method Service Department Production Department Sourcing Operations Assembly Finishing 189,000 245,000 426,000 271,000 -189,000 75,600 113,400 Overheads Allocation of Sourcing Dept costs (Ratio of 40:60) Total 697,000 189,000 -245,000 133,636 245,000 Allocation of Operations Dept costs (Ratio of 60:50) Total 635,236 4 95,764 1,131,000 Step Method Service Department Production Department Sourcing Operations Assembly Finishing 189,000 245,000 426,000 271,000 -189,000 31,500 63,000 94,500 Overheads Allocation of Sourcing Dept costs Allocated first Total 697,000 157,500 276,500 150,818 125,682 276,500 Allocation of Operations Dept costs (Ratio of 60:50) Total 639,818 491,182 1,131,000 Reciprocal Department Service Department Production Department Sourcing Operations Assembly Finishing 189,000 245,000 426,000 271,000 70,513 105,769 Total 697,000 176,282 Overheads Allocation of Sourcing (40:60) Allocation of Operations (60:50) 140,128 116,773 256,901 Total 636,641 493,542 1,130,183 working note Sourcing Operations Sourcing Operations Sourcing Operations Assembly 20,000 40,000 10,000 60,000 16.6667% 33.3333% 8.3333% 50.0000% Finishing 60,000 50,000 50.0000% 41.6667% Total 120,000 120,000 100% 100% Simultaneous Equation method S=189,000+8.33% O= 245,000 + 16.67% S=Sourcing Dept O=Operations Dept Solving above equation S= 189,000 + 8.33% (245,000+16.67% S) S= 189,000 + 19,600 +0.0139 S 0.98615= 208,600 S=208,600/0.9861 Total Cost S=211,538 O= 280,256 2. Total cost in Production Department after allocation Total Service Dept Cost allocated Total Production cost a. $209,236 $224,764 $635,236 $495,764 Direct Method Assembly Finishing Step Method Assembly Finishing Reciprocal Method Assembly Finishing $213,818 $220,182 $639,818 $491,182 $210,641 $222,542 $636,641 $493,542