alter port departments Haida Pottery Inc. is divided into two operating division

Question

alter port departments Haida Pottery Inc. is divided into two operating divisions: Pottery n pany allocates Power and Human Resources department costs to sion. Power costs are allocated on the basis of the number of machine resources costs on the basis of the number of employees. No effo fixed and variable costs; however, only budgeted costs are allocated OBJECTIVE 3 Problem and Retail. The Problem 7-30 COMPARISON OF METHODS OF ALL to each the ntoyees. ilocated. Allocations for s is made to Allto coming year are based on the following data: Operating Divisions Support Departments Human Resources Pottery Rea Power $150,000 2,000 20 $160,000 1,000 17 $83,600 $47 800 3,600 5,400 Overhead costs Machine hours 60 Number of employees 80 Round all allocation ratios to four significant digits. Round all al nearest dollar. allocated amounts to the Kaund al alocartion ratios to four significant digits. Round all alt Required Allocate the support service costs using the direct method. 2. Allocate the support service costs using the sequential method. The support d epan ments are ranked in order ofhighest cost to lowest cost. Allocate the support service costs using the reciprocal method. 3.

Explanation / Answer

Solution Reciprocal method Particulars Operating cost Support cost Pottery cost Retail cost Power Human resources Over head cost 83600 47800 150000 160000 Allocation of Power cost 61975 92962 -172152 17215 See working note 1 (172152*0.36) (172152*0.54) nil (172152*0.10) Allocation of human cost 66455.6 88607.5 22151.9 -177215.0 See working note 2 (177215*0.375) (177215*0.375) (177215*0.125) nil Toatl 212030 229370 0 0 Working Notes 1 Ratio of distribtuion of power cost i.e. in the ratio of machine hours Particulars Pottery Retail Human resources Total Hours consumed 3600 5400 1000 10000 Ratio    (%) 36 54 10 100 2 Ratio of distribtuion of Human cost i.e. in the ratio of employees Particulars Pottery Retail Power Total no of employees 60 80 20 160 Ratio    (%) 37.5 50 12.5 100 3 So reciprocal ratio will be as under Let total oh of power = X Let total OH of human = Y Now distribution will be as under X= Original cost of power OH + 12.5% of Human cost X= 150000+12.5% of Y Equation 1 Other equation is as under Y= original cost of Human cost+ 10% of power cost Y= 160000+ 10% of X Equation 2 Put value of equation 1 in 2 Y = 160000+ 0.10(150000+0.1250Y) Y= 160000+15000+0.0125Y Y-0.0125Y= 175000 Y =     175000/0.9875 Y =   177215.1899 Hence total cost of Human resources OH= 177215 Put this value of Y in equation 1 X= 150000+12.5% of 177215    = 150000+22152 172152 Hence total Power OH = 172152

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