Please show your work. Thank you so much! Glass Creations Company is developing
ID: 2464895 • Letter: P
Question
Please show your work. Thank you so much!
Glass Creations Company is developing departmental overhead rates based on direct-labor hours for its two production departments, Etching and Finishing. The Etching Department employs 20 people and the Finishing Department employs 80 people. Each person in these two departments works 2,000 hours per year. The production-related overhead costs for the Etching Department are budgeted at $400,000, and the Finishing Department costs are budgeted at $640,000. Two service departments, Maintenance and Computing, directly support the two production departments. These service departments have budgeted costs of $96,000 and $500,000, respectively. The production departments' overhead rates cannot be determined until the service departments' costs are allocated. The following schedule reflects the use of the Maintenance Department's and Computing Department's output by the various departments. Required: 1. Use the reciprocal-services method to allocate service department costs. Calculate the overhead rates per direct-l abor hour for the Etching Department and the Finishing Department. (Do not Round intermediate calculations. Round the "Overhead rate per hour" to 3 decimal places. Amounts to be deducted should be indicated by a minus sign.)Explanation / Answer
Service Departments overhead costs are allocated to the user departments by three methods:
Reciprocal Method
This Method recognizes all the services provided by any department, including those provided to other service departments.
Glass Creations Company have two service departments (Maintenance and Computing) and two production departments (Etching and finishing).Now service department cost is allocated to the production department’s basis the maintenance hours and minutes.
Under this method service department costs are calculated by the simultaneous solution method:
Total Service Department Cost = DC of service department + Cost allocated to the service department
Percentage allocation of services to other departments is as follows:
A
B
C
D
E
Maintenance (S1)
Computing(S2)
Usage of S1
Percent
Usage of S2
Percent
Departments
Maintenance hours
of total
Minutes
of total
Maintenance (S1)
240,000
20%
Computing (S2)
1,000
10%
Etching (P1)
1,000
10%
840,000
70%
Finishing (P2)
8,000
80%
120,000
10%
Total Usage
10,000
100%
1,200,000
100%
Now equations are shown as under:
Total SD Costs = DC of service department + Cost allocated to the Service Department
S1 (Maintenance) = 96,000 + .20S2
S2 (Computing) = 500,000 + .1S1
Now by substituting the first equation into the second equation will give the answer as:
S2 = 500,000+ .1 (96,000 + .20S2)
S2 = 500,000 + 9,600+.02S2
.98S2 = 509,600
S2= 520,000
Now substituting value of S2 in first equation
S1= 96,000 +.20(520,000)
S1= 200,000
Thus, Costs of both the service departments are calculated which will be further allocated to the operating departments.
Service Department Cost allocation of UP by Reciprocal Method is as follows:
Service Department Cost Allocation Computations
A
B
C
D
E
F
Maintenance (S1)
Computing(S2)
Usage of S1
Percent
Usage of S2
Percent
Departments
Maintenance hours
of total
Minutes
of total
Maintenance (S1)
2,40,000
20%
Computing (S2)
1,000
10%
Etching (P1)
1,000
10%
8,40,000
70%
Finishing (P2)
8,000
80%
1,20,000
10%
Total Usage
10,000
100%
12,00,000
100%
Reciprocal Method:
Percent Allocable to
Deptt.
Maintenance
Computing
Etching
Finishing
Service Department
Direct Cost
S1
S2
P1
P2
Maintenance (S1)
2,00,000
0%
10%
10%
80%
Computing (S2)
5,20,000
20%
0%
70%
10%
Amount Allocable to
Maintenance
Computing
Etching
Finishing
From
S1
S2
P1
P2
Direct Department Cost
96,000
5,00,000
4,00,000
6,40,000
Maintenance (S1)
-2,00,000
20,000
20,000
1,60,000
Personnel (S2)
1,04,000
-5,20,000
3,64,000
52,000
Total overhead Cost
0
0
7,84,000
8,52,000
Direct labour hours
40,000
1,60,000
Overhead rate per hour
19.6
5.3
So the overhead rate for etching department is 19.6 per hour and for finishing department is 5.3 per hour
A
B
C
D
E
Maintenance (S1)
Computing(S2)
Usage of S1
Percent
Usage of S2
Percent
Departments
Maintenance hours
of total
Minutes
of total
Maintenance (S1)
240,000
20%
Computing (S2)
1,000
10%
Etching (P1)
1,000
10%
840,000
70%
Finishing (P2)
8,000
80%
120,000
10%
Total Usage
10,000
100%
1,200,000
100%