Please make sure that you use all three methods DIRECT, STEP-DOWN, AND RECIPROCA
ID: 2336572 • Letter: P
Question
Please make sure that you use all three methods
DIRECT, STEP-DOWN, AND RECIPROCAL.
Thanks.
Problem 2: Dye Engineering (Service Department Cost Allocation) Budgeted cost data for the production and service departments of Dye Engineering are as follows: Machining Assembly Payroll IT Total $600,000 400,000 600,000 232,000 $1,832,000 Of its 16,000 budgeted direct labor hours, Payroll plans to spend 1,600 direct labor hours furnishing service to IT, 4,000 direct labor hours for Machining, and 10,400 for Assembly. Of its 4,000 hours of budgeted time, IT plans to spend 800 hours on work for Payroll, 2,000 hours for Machining, and 1,200 hours for Assembly. Determine the costs allocated to the production departments (i.e. Machining and Assembly) using the direct method, the step down method, and the reciprocal method. In the step down method, use the following order: Payroll and then IT.Explanation / Answer
Answer
Departments
Support Departments
Payroll
IT
machining
assembly
Payroll
10.00%
25%
65%
IT
20%
50%
30%
Budgeted Cost
$ 600,000.00
$ 232,000.00
$ 600,000.00
$ 400,000.00
Department
Supplying (Service Department)
Using Department
Payroll
IT
machining
assembly
Budgeted Cost
$ 600,000.00
$ 232,000.00
$ 600,000.00
$ 400,000.00
Allocation of:
Payroll
$ (600,000.00)
$ 166,666.67
$ 433,333.33
IT
$ (232,000.00)
$ 145,000.00
$ 87,000.00
Total cost after allocation have been made
$ -
$ -
$ 911,666.67
$ 920,333.33
$ 1,832,000
Department
Supplying (Service Department)
Using Department
Payroll
IT
machining
assembly
Budgeted Cost
$ 600,000.00
$ 232,000.00
$ 600,000.00
$ 400,000.00
Allocation of:
Payroll
$ (600,000.00)
$ 60,000.00
$ 150,000.00
$ 390,000.00
IT
$ -
$ (292,000.00)
$ 182,500.00
$ 109,500.00
Total cost after allocation have been made
$ -
$ -
$ 932,500.00
$ 899,500.00
$ 1,832,000
---Working
Service Department
Direct Cost
% of service receivables from other service department
Let the Total cost be:
Payroll
$ 600,000.00
20%
From IT
X
IT
$ 232,000.00
10%
From Payroll
Y
Equation #1
X
=
600000
+
20%
of
Y
X
=
600000
+
0.2Y
Equation #2
Y
=
232000
+
10%
of
X
Y
=
232000
+
0.1X
Putting the Value of 'Y' into Equation #1
X
=
600000
+
0.2(232000+ 0.1X)
X
=
600000
+
(46400 + 0.02X)
X
=
600000
+
46400
+
0.02X
X
-
0.02X
=
600000
+
46400
0.98X
=
646400
X
=
646400 / 0.98
X
=
659591.8367
Putting the Value of 'X' calculated above into Equation #2
Y
=
232000
+
10%
of
X
Y
=
232000
+
10%
x
659591.8367
Y
=
232000
+
65959.18367
Y
=
297959.1837
Service Department
Payroll calculated as 'X'
Using Departments:
Total cost to be allocated
% of service used
Cost allocated
IT
$ 659,591.84
10%
$ 65,959.18
machining
25%
$ 164,897.96
assembly
65%
$ 428,734.69
0
0%
$ -
Total cost allocated
$ 659,591.84
Service Department
IT calculated as 'Y'
Using Departments:
Total cost to be allocated
% of service used
Cost allocated
Payroll
$ 297,959.18
20%
$ 59,591.84
machining
50%
$ 148,979.59
assembly
30%
$ 89,387.76
0
0%
$ -
Total cost allocated
$ 297,959.18
---Final Allocation
Department
Supplying (Service Department)
Using Department
Payroll
IT
machining
assembly
Budgeted Cost
$ 600,000
$ 232,000
$ 600,000
$ 400,000
Allocation of:
Payroll
$ (659,592)
$ 65,959
$ 164,898
$ 428,735
IT
$ 59,592
$ (297,959)
$ 148,980
$ 89,388
Total cost after allocation have been made
$ -
$ -
$ 913,878
$ 918,122
$ 1,832,000
Departments
Support Departments
Payroll
IT
machining
assembly
Payroll
10.00%
25%
65%
IT
20%
50%
30%
Budgeted Cost
$ 600,000.00
$ 232,000.00
$ 600,000.00
$ 400,000.00