Betty DeRose, Inc. operates two production departments, molding and assembly, an

Question

 Betty DeRose, Inc. operates two production departments, molding and assembly, and two service departments, repair and power. Service department costs are allocated to production departments using a reciprocal two-stage allocation method. Repair department costs are allocated on the basis of repair hours and power department costs are allocated on the basis of kilowatt hours. In the second stage, departmental overhead rates for the two production departments are calculated using direct labor hours as the activity for each department. Information for the four departments is given below:                              Repair     Power     Molding     Assembly Directly trace overhead    $83,200   $160,000   $245,600    $320,000   Repair hours                60,000      8,000     10,000      22,000 Kilowatt hours             160,000    600,000    180,000      60,000 Direct labor hours            N/A        N/A      80,000     140,000  The company is preparing to bid on a job, job #45, which requires 40 direct labor hours in the molding department and 25 direct labor hours in the assembly department. The direct material and direct labor cost for job #45 is expected to total $311.  Calculate the total expected cost of job #45.

Explanation / Answer

Solution:

Service department cost = Direct Cost + Allocated Cost

Repair Department Cost = $83,200 + [160000 / (160000+180000+60000)]* Power Cost

                                                    = $83,200 + 0.40*Power Cost

Power Department Cost = $160,000 + [8000 / (8000+10000+22000)]* Repair cost

                                             = $160,000 + 0.20 * repair Cost

Power Cost = $160,000 + 0.20 ($83,200 + 0.40*Power Cost)

Power Cost = $160,000 + $16,640 + 0.08*Power Cost

Power Cost = $176,640 / 0.92 = $192,000

Repair Cost = $83,200 + 0.40*$192,000 = $160,000

From Service Department Cost Allocation - Reciprocal Method Service Department Production Departments Repair Power Molding Assembly Direct charges of department $83,200 $160,000 $245,600 $320,000 Repair (8:10:22) -$160,000 $32,000 $40,000 $88,000 Power (16:18:6) $76,800 -$192,000 $86,400 $28,800 Total $0 $0 $372,000 $436,800

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