Question

The managers of Yoyodyne Propulsion Systems are discussing ways to allocate the cost of support departments such as Quality Control and Maintenance to the Machining and Assembly production departments. To aid them in this discussion, the controller has provided the following information:

	Quality Control	Maintenance	Machining	Assembly	Total
Budgeted overhead costs before allocation	$350,000	$200,000	$400,000	$300,000	$1,250,000
Budgeted Machine-hours	-	-	50,000	-	50,000
Budgeted Direct manufacturing labor-hours	-	-	-	25,000	25,000
Budgeted units of service:
- Quality Control	-	7,000	21,000	7,000	35,000
- Maintenance	10,000	-	18,000	12,000	40,000

If Yoyodyne uses the direct method of allocating support department costs, the total support costs allocated to the Assembly Department would be closest to:

	a.	$87,500
	b.	$120,000
	c.	$167,500
	d.	$467,500

Using the direct method, the budgeted total overhead rate per machine-hour at Yoyodyne would be closest to:

	a.	$5.25
	b.	$15.65
	c.	$9.35
	d.	$8.00

If Yoyodyne uses the step-down method of allocating service costs beginning with Quality Control, the Maintenance costs allocated to the Assembly Department would be closest to:

	a.	$200,000
	b.	$162,000
	c.	$108,000
	d.	$70,000

If Yoyodyne uses the reciprocal method of allocating service costs, the complete reciprocated cost of Quality Control would be closest to:

	a.	$284,211
	b.	$336,842
	c.	$350,000
	d.	$421,053

Answer 1

Solution Allocation of support department cost to production department using direct method Under direct method, support department cost is directly allocated to the production departments using the allocation base. In this method, no cost from one support department to another support department is allocated. This method is the simple method and ignores the services provided by one support department to another support department. Production Departments Support Departments Quality Control Maintenance Machining Assembly $350,000 $400,000 Direct Overhead Cost (a) $200,000 $300,000 Allocations: $262,500 ($350,000) Quality Control $0 $87,500 ($350,000 x ($350,000x 21,000/28,000) 7,000/28,000) ($200,000) $120,000 $80,000 Maintenance ($200,000 x ($200,000 x 18,000/30,000) 12,000/30,000) Total support Department costs allocated (b) $167,500 $382,500 Total overhead costs after allcoation (a+b) $0 $782,500 $467,500 $0 If Yoyodyne uses the direct method of allocating support department costs, the total support costs allocated to the Assembly Department would be closest to: c. $167,500 Total Machining Department overhead cost after allocation $782,500 Budgeted Machine-hours 50,000 Budgeted total overhead rate per machine-hour ($782,500/ 50,000) $15.65 Using the direct method, the budgeted total overhead rate per machine-hour at Yoyodyne would be closest to: b. $15.65 Allocation of support department cost to production department using step-down method Step-down method is a method of allocating the support department cost to the production departments and other support department in a sequential manner. In this method the ranking of allocating the support department cost is assigned based on the largest portion of cost consumed by the other support departments i.e. the department which has the largest portion of its costs consumed by other support department gets the first rank and so on. Once the cost of a department is allocated to other departments, that department is excluded while allocating cost of other departments. Thus in a sequential step down manner, all the support department cost is allocated to the production departments

Production Departments Support Departments Quality Control Maintenance Machining Assembly Direct Overhead Cost (a) $350,000 $200,000 $400,000 $300,000 Allocations: ($350,000) $210,000 $70,000 $70,000 Quality Control (S350,000 x (S350,000 x (S350,000 x 7,000/35,000) 21,000/35,000) 7,000/35,000) ($270,000) $162,000 $108,000 Maintenance ($270,000 x ($270,000 x 18,000/30,000) 12,000/30,000) Total support Department costs allocated (b) $178,000 $372,000 Total overhead costs after allcoation (a +b) $0 $772,000 $0 $478,000 If Yoyodyne uses the step-down method of allocating service costs beginning with Quality Control, the Maintenance costs allocated to the Assembly Department would be closest to: c. $108,000 Allocation of support department cost to production department using reciprocal method Under reciprocal method, Interdepartmental support cost from one support department to another support department is also allocated. Under this method, interdepartmental support cost from another support department is allocated using algebraic equation. Lets assume that the total cost (including the cost from other support department), of Quality Control Department and Maintenance Department is 'X' & 'Y' respectively Now, $350,00010,000 40,000) Y $350,000 0.2 5Y X $200,0007,000 35,000) X $200,000+0.20x Y

Now substituting the value of Y in first equation $350,000 0.25 ($200,000 + 0.2ox) X $350,000+$50,000 +0.05x $400,000+0.05x $400,000/ (1-0.05) $421,053 Now substituting the value of x in second equation, $200,000 0.20 x $421,053 Y $284,211 Production Departments Support Departments Quality Control Maintenance Machining Assembly $350,000 $200,000 $400,000 $300,000 Direct Overhead Cost (a) Allocations: ($421,053) $84,211 $252,632 $84,211 Quality Control ($421,053x ($421,053 x ($421,053 x 21,000/35,000) 7,000/35,000) 7,000/35,000) $71,053 $127,895 ($284,211) $85,263 Maintenance ($284,211 x 10,000/40,000) ($284,211 x ($284,211 x 18,000/40,000) 12,000/40,000) Total support Department costs allocated (b) $380,526 $169,474 Total overhead costs after allcoation (ab) $0 $469,474 $0 $780,526 If Yoyodyne uses the reciprocal method of allocating service costs, the complete reciprocated cost of Quality Control would be closest to: d. $421,053