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4 Problem 17-33 Reciprocal-Service Method (Appendix) (LO 17-6) points Celestial Artistry Company is developing departmental overhead rates based on direct-labor hours for its two production departments, Etching and Finishing. The Etching Department employs 25 people and the Finishing Department employs 75 people. Each person in these two departments works 1,700 hours per year. The production- related overhead costs for the Etching Department are budgeted at $170,000, and the Finishing Department costs are budgeted at $290,000. Two service departments, Maintenance and Computing, directly support the two production departments. These service departments have budgeted costs of $47,740 and $315,000, respectively. The production departments' overhead rates cannot be determined until the service departments' costs are allocated. The following schedule reflects the use of the Maintenance Departments and Computing Department's output by the various departments. Service Department Maintenance (maintenance hours) Computing (minutes) Using Department Maintenance Computing Etching 0 1,130 1,130 255,600 0 894,600 Finishing 9 ,040 127,800 Required: 1. Use the reciprocal-services method to allocate service department costs. Calculate the overhead rates per direct- labor hour for the Etching Department and the Finishing Department. 2. Which of the three methods of service department cost allocation results in the most accurate overhead rates? Answer is not complete. Complete this question by entering your answers in the tabs below. Required Required 2 Use the reciprocal-services method to allocate service department costs. Calculate the overhead rates per direct-labor hour for the Etching Department and the Finishing Department. (Do not round intermediate calculations. Round the "Overhead rate per hour" to 3 decimal places. Amounts to be deducted should be indicated by a minus sign.) Production Departments Etching Finishing Service Departments Maintenance Computing $ 47,740 $ 315,000 47,740% 38,192 Traceable costs Allocation of Maintenance Department costs Allocation of Computing Department costs Total service department costs allocated Overhead costs traceable to production departments Total overhead cost Direct-labor hours (DLH) Overhead rate per hour $ $ 0 $ $ 0 42,500 10.700x 0 127,500 2.890X

Answer 1

Answer to 1.
Service department cost = Direct Cost + Allocated Cost
Maintenance Department Cost
= $47740 + [ 255600 / (255600+894600+127800)] x computing cost
= $47740 + Computing cost x 20%
Computing Department Cost
= $315000 + {1130 / (1130+1130+9040)} x Maintenance Cost
= $315000 + Maintenance cost x 10%
Now,
Computing Department Cost = $315000 + Maintenance cost x 10%
Computing Department Cost = $315000 + [$47740 + (Computing cost x 20%)]x 10%
Computing Department Cost = $315000 + $4774 + (Computing cost x 2%)
98% of computing costs = $319774
Computing Costs = $326300
Maintenance Department Cost = $47740 + Computing cost x 20%
Maintenance Department Cost = $47740 + ($326300 x 20%)
Maintenance Department Cost = $113000

Service Department Cost Allocation - Reciprocal Method & calculation of overhead rate
per direct labor hour for Etching department & Finishing Department
				In $
	Service Departments		Production Departments
	Maintenance	Computing	Etching	Finishing
Budgeted Costs	47740	315000
Maintenance cost being allocated	-113000	11300	11300	90400
Computing cost being allocated	65260	-326300	228410	32630
Total Service department Cost			239710	123030
Add: Budgeted Costs			170000	290000
Total departmental overheads cost (a)			409710	413030
Direct labor hours (b)
(1700 x 25 employees)			42500
(1700 x 75 employees)				127500
Overhead rate per direct labor hour (a/b)			9.64	3.24

Answer to 2.

It can be seen by the above calculation that reciprocal-services method results in most accurate overhead rates as it uses accurate mathematical equations to find out the total cost for each of the service department. Accordingly service costs can be separately calculated & allocated proportionately over all departments.