1. Under the direct method, what percentage of IT should be allocated to Machini
ID: 341405 • Letter: 1
Question
1. Under the direct method, what percentage of IT should be allocated to Machining?
2. Under the step method, what percentage of PM should be allocated to IT?
3. Using the reciprocal method, what is the formula for determining the total PM costs that should be allocated?
PM = 500,000 + .2IT
PM = 500,000 + .2(450,000)
PM = 500,000 + .1(450,000)
4. Using the reciprocal method, what is the formula for determining the total IT costs that should be allocated?
IT =500,000 + .1PM
IT = 450,000 + .1PM
IT = 500,000 + .1(450,000)
Background information for all problems: Chek ey Manufacturing hastwo production departments (Machining and Assembly). They havetwo servicedepartments that provide services to each other and to production (Plant Maintenance and IT) Chekley believes Plant Maintenance (PM) should beallocated based on squarefootageand IT should beallocated based on computer hours. Chekley allocates Plant Maintenance first when allocating using thestep method. You havethefollowing additional information: manufacturing $500,000 $450,000 $2,000,000 COSTS Plant maintenance Information systems Machining Assembly $6,100,000Explanation / Answer
Req 1: Information system cost: $ 450,000 To be allocated to Machining and Assembly in the ratio of Computer hours of both the department under Direct method. Therefore, Total Computer hours of both the department: Machining 24,000 Assembly 8000 Total 32000 Percentagee of IT cost to be allocated to machining: 24000 hours / 32000 hours *100 = 75% Req 2: PM cost: $ 500,000 To be allocated in other department on the basis of square footage under reciprocal methd. Total square feet is as follows: Machining 12000 Assembly 6000 Information system 2000 Total Square feet 20000 Percentage of PM cost allocated to IT: 2,000 sq. feet / 20,000 sq. ft *100 = 10% Req 3: PM cost: $ 500,000 Percentage of services of IT departmetn to be alocated to PM: 8,000 hours /40,000 hours = 20% of IT cost allocated to PM Therefore, Formula for computing the total cost of PM is as follows: PM cost 500,000 Add: 20% of IT cost 0.2 IT Total cost of PM: 500,000 +0.2IT Rreq 4: IT cost: $ 450,000 Percentage of PM service allocated to IT: 10% of PM cost Therefore, Formula for computing the total cost of IT is as follows: IT cost 450,000 Add: 10% of PM 0.10 PM Total cost 450,000 +0.10 PM
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