JME has the following data from his service and production departments - Service

Question

JME has the following data from his service and production departments - Service 1 is maintenance, incurs $20,000 of cost, and is driven by square feet Service 2 is tech support, incurs $15,000 of cost, and is driven by machine hours Production 1 is Cutting - Production 2 is Finishing Provider si User S1 S2 10 S2 P1 P2 20 40 30 45 65 Required - You are to determine how much of the $35,000 will be in each production department (P1 and P2) when they determine their departmental overhead rates. You need to do this under 4 approaches - direct, step (2 ways) and reciprocal. You should round to whole dollars and NOT worry if you are off a very few dollars.

Explanation / Answer

Answer 1. Service Department Cost Allocation Statement Under Direct Method Service Production S1 S2 P1 P2 Budgeted Overhead Costs                20,000                  15,000 Allocation of S1 Costs              (20,000)                11,429                  8,571 Allocation of S2 Costs               (15,000)                  6,136                  8,864 Total Allocated Costs                         -                             -                  17,565                17,435 Allocation of AS Costs P1 - $20,000 X 40/70                11,429 P2 - $20,000 - 30/70                  8,571 Allocation of IS Costs P1 - $15,000 X 45/110                  6,136 P2 - $15,000 X 65/110                  8,864 Answer 2. Service Department Cost Allocation Statement Under Step Down Method (Allocate S1 First) Service Production S1 S2 P1 P2 Budgeted Overhead Costs                20,000                  15,000 Allocation of S1 Costs - 20:40:30              (20,000)                    4,444                  8,889                  6,667 Allocation of S2 Costs - 45:65               (19,444)                  7,954                11,490 Total Allocated Costs                         -                              0                16,843                18,156 Answer 3. Service Department Cost Allocation Statement Under Step Down Method (Allocate S2 First) Service Production S1 S2 P1 P2 Budgeted Overhead Costs                20,000                  15,000 Allocation of S2 Costs - 10:45:65                  1,250               (15,000)                  5,625                  8,125 Allocation of S1 Costs - 40:30              (21,250)                12,143                  9,107 Total Allocated Costs                         -                             -                  17,768                17,232 Answer 4. Reciprocal Method Express Support department budgeted costs and reciprocal relationships in the form of linear equations: Equation 1 - S1 = $20,000 + 0.08333 S2 Equation 2 - S2 = $15,000 + 0.22222 S1 Putting Equation 1 in Equation 2, we get S2 = $15,000 + 0.22222 X ($20,000 + 0.08333 S2) S2 = $15,000 + 4,444.44 + 0.18519 S2 S2 = $19,811.32 or say $19,811 (Approx.) Putting value of S2 in Equation 1, we get S1 = $20,000 + 0.08333 X $19,811 S1= $21,650.94 or say $21,651 (Approx.) Service Department Cost Allocation Statement Under Reciprocal Method Service Production S1 S2 P1 P2 Budgeted Overhead Costs                20,000                  15,000 Allocation of S1 Costs - 20:40:30 $         (21,651) $                4,811 $              9,623 $              7,217 Allocation of S2 Costs - 10:45:65 $              1,651 $           (19,811) $              7,429 $            10,731 Total Allocated Costs $                    (0) $                        0 $            17,052 $            17,948

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