Exercise 11-28 Cost Allocation: Reciprocal Method (LO 11-4) Warren Ltd. has two
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Question
Exercise 11-28 Cost Allocation: Reciprocal Method (LO 11-4)
Warren Ltd. has two production departments, Building A and Building B, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of June follow::
Use the reciprocal method to allocate the service costs. (Matrix algebra is not required.) (Do not round intermediate calculations. Round your answer to the nearest dollar amount.)
Warren Ltd. has two production departments, Building A and Building B, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of June follow::
Explanation / Answer
Allocation of Cost through Reciprocal Method Original Cost of Service Deptt. Maintenance(M) $ 218,000 Cafeteria© $ 145,000 After getting the share from distribution of Service Deptt, Maintenance(M) = 218000+70% of Cafeteria ( C) Cafeteria ( C) = 145000+20% of Maintenance (M) By putting the value of 'C' in equation 1 M = 218000+70%(145000+20% of M) M = 218000+101500+0.14M M-0.14M = 319500 M = 319500/0.86 M = $ 371,511 By putting the value of 'M' in equation 2 C = 145000+371511*.20 C = 145000+74302 C = $ 219,302 Hence, Maintenance Cost $ 371,511 Cafeteria Cost $ 219,302 Cost Allocation From Maintenance Cafeteria Building A Building B Service Deptt Cost 505000 326000 Maintenance 218000 (371511*.20)=74302 (371511*.40)= 148604 (371511*.40)=148605 -148604 -148605 -74302 Cafeteria (219302*.70)=153511 145000 (219302*.10)=21930 (219302*.20)=43861 -21930 -43861 -153511 TOTAL NIL NIL $ 675,534 $ 518,466
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