Duweynie Pottery, Inc., is divided into two operating divisions: Pottery and Ret

Question

Duweynie Pottery, Inc., is divided into two operating divisions: Pottery and Retail. The company allocates Power and General Factory department costs to each operating division. Power costs are allocated on the basis of the number of machine hours and general factory costs on the basis of square footage. No effort is made to separate fixed and variable costs; however, only budgeted costs are allocated. Allocations for the coming year are based on the following data: Round all allocation ratios to four significant digits. Round all allocated amounts to the nearest dollar. Allocate the support service costs using the direct method. Allocate the support service costs using the sequential method. The support departments are ranked in order of highest cost to lowest cost.

Explanation / Answer

REQ 1. ALLOCATION BASED ON DIRECT METHOD Support Operations Power Gen. factory Pottery Retail Allocated Overheads cost 150000 160000 98000 56000 Add: OH of Power Deptt -150000 103500 46500 ($ 150,000 in MH i.e. 6900:3100) Add: OH of Gen. factory -160000 64000 96000 ($ 160,000 in sq. foot i.e4000:6000) OVERHEADS ALLOCATED 0 0 265500 198500 REQ2: ALLOCATION BASED ON SEQUENTIAL METHOD Support Operations Power Gen. factory Pottery Retail Allocated Overheads cost 150000 160000 98000 56000 Add: OH of Gen. factory 26667 -160000 53333 80000 ($ 160,000 in sq. foot i.e 2000:4000:6000) Total Overheads 176,667 0 151333 136000 Add: OH of Power Deptt -176667 0 121900 54767 ($ 176,667 in MH i.e. 6900:3100) OVERHEADS ALLOCATED 0 0 273233 190767 Note: Under Sequential method, the Support deptt i.e. General factory is haaving higher cocst shall be allocated first.

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