Caro Manufacturing has two production departments, Machining and Assembly, and t
ID: 2390554 • Letter: C
Question
Caro Manufacturing has two production departments, Machining and Assembly, 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 August follow: Proportion of Services Used by Maintenance CafeteriaMachining Department Direct Costs Assembly $120,000 78,000 49,000 34,000 0.1 Maintenance Cafeteria 0.5 0.2 0.4 0.1 0.7 Required: Use the reciprocal method to allocate the service costs. (Matrix algebra is not required.) (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.) Cost Allocation To: From: Maintenance Cafeteria MachiningAssembly Service department costs Maintenance Cafeteria TotalExplanation / Answer
Solution:
Service department cost = Direct Cost + Allocated Cost
Maintenance Department Cost = $49,000 + 0.7 * Cafeteria cost
Cafeteria Cost = $34,000 + 0.1* Maintenance Cost
Cafeteria Cost = $34,000 + 0.1 ($49,000 + 0.7*Cafeteria Cost)
Cafeteria Cost = $34,000 + $4,900 + 0.07*Cafeteria Cost
Cafeteria Cost = $38,900 / 0.93 = $41,828
Maintenance Cost = $49,000 + 0.7*$41,828 = $78,280
From Service Department Cost Allocation - Reciprocal Method Service Department Production Departments Maintenance Cafeteria Machining Assembly Direct charges of department $49,000 $34,000 $120,000 $78,000 Maintenance (1:5:4) -$78,280 $7,828 $39,140 $31,312 Cafeteria (7:2:1) $29,280 -$41,828 $8,366 $4,183 Total $0 $0 $167,506 $113,495