Hinson Corporation has two production departments – machining and finishing. The

Question

Hinson Corporation has two production departments – machining and finishing. The
production departments are supported by two service departments – scheduling and
purchasing. Hinson has the following labor hours devoted by each of the service
departments to the other departments.

Total Labor Hours Used
Purchasing Scheduling Machining Finishing
Purchasing 15,000 45,000 65,000
Scheduling 16,000 48,000 36,000

The direct costs incurred in each department are as follows:

Department Costs
Purchasing $155,000
Scheduling 275,000
Machining 415,000
Finishing 480,000
Total $1,325,000

Required
a. Calculate the total costs in each production department after allocating the service
department costs to the production departments using the:
i. Direct method.
ii. Step-down method (start with Purchasing).
iii. Reciprocal method.

Explanation / Answer

Hinson Corporation

Allocation of Service department Costs

Total Labor Hours Used

Calculation of Percentages of Labor Hour used

In this method, the service departments costs are to be distributed as under

Department Costs
Purchasing $155,000
Scheduling 275,000
Machining 415,000
Finishing 480,000
Total $1,325,000

i. Direct method:

First we have to calculate the factors to apportion service department overheads:

We then multiply the service department overhead by the above factors to obtain the amount of overhead to be allocated to each production department.

ii. Step-down method:

Calculation of Percentage of Allocation:

iii. Reciprocal method:

The service departments costs are to be distributed as under

Original costs of service departments:

Scheduling (X) = 155,000

Purchasing (Y) = 275,000

After getting the share from distribution of service departments:

X = 155,000 + 16%Y

Y = 275,000 + 12%X

By putting the value of Y in equation (1)

X = 155,000 + 16%( 275,000 + 12%X)

X = 155,000 + 44,000 + 0.0192X

0.9808X = 199,000

X = 202,896

By putting the value of X in equation (2)

Y = 275,000 + 12%X

Y = 275,000 + 12%(202,896)

Y = 299,347

Purchasing Scheduling Machining Finishing Purchasing - 15,000 45,000 65,000 Scheduling 16,000 - 48,000 36,000

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.