The document discusses several methods for allocating overhead costs across production departments:
1. The direct method allocates costs to each department based on a pre-determined ratio.
2. The step method first allocates costs to individual departments, then reallocates any remaining costs based on another ratio.
3. The reciprocal method is an iterative process that calculates total costs for each department based on a formula involving allocation ratios.
The methods are demonstrated through examples allocating design and programming department costs across two production departments. Overall allocation ratios and total costs for each department are shown using the different approaches.
The document discusses several methods for allocating overhead costs across production departments:
1. The direct method allocates costs to each department based on a pre-determined ratio.
2. The step method first allocates costs to individual departments, then reallocates any remaining costs based on another ratio.
3. The reciprocal method is an iterative process that calculates total costs for each department based on a formula involving allocation ratios.
The methods are demonstrated through examples allocating design and programming department costs across two production departments. Overall allocation ratios and total costs for each department are shown using the different approaches.
The document discusses several methods for allocating overhead costs across production departments:
1. The direct method allocates costs to each department based on a pre-determined ratio.
2. The step method first allocates costs to individual departments, then reallocates any remaining costs based on another ratio.
3. The reciprocal method is an iterative process that calculates total costs for each department based on a formula involving allocation ratios.
The methods are demonstrated through examples allocating design and programming department costs across two production departments. Overall allocation ratios and total costs for each department are shown using the different approaches.
The document discusses several methods for allocating overhead costs across production departments:
1. The direct method allocates costs to each department based on a pre-determined ratio.
2. The step method first allocates costs to individual departments, then reallocates any remaining costs based on another ratio.
3. The reciprocal method is an iterative process that calculates total costs for each department based on a formula involving allocation ratios.
The methods are demonstrated through examples allocating design and programming department costs across two production departments. Overall allocation ratios and total costs for each department are shown using the different approaches.
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7-29 The Direct Method Net service to both production Departrnents for service: Department 1: 100% - 10% = 90% Production Departrnent 1 share:20%/90% = 2/9 Production Departrnent 2 share: 70%/90% =7/9
Net Service to both Production Departrnents for Service:
Department 2: 100% - 10% = 90% Production Departrnent 1 share: 30%/90% = 1/3 Production Departrnent 2 share: 60/90% = 2/3
Production Departmnent 1 Production Departrnent 2
Service department I cost allocation 225000 X 2/9 = 50000 225000 x 7 /9 175000 Service departrnent 2 cost allocation 72000 x 1 /3 = 24000 72000 x 213 = 48000 Add: Initial Production Dept- Costs 59000 165000 Total Cost for Each Production Dept- 133000 388000
Step Method Service Dept 2 Production Dept 1
Allocation of Service Dept I 225000 x 10% = 22500 225000 x 20% = 45000
Allocation of Service Dept 2 72000 + 22500 - 94500 x 1/3 - 31500 Add: Initial Production Dept Costs 59000 Total Cost for Each Production Dept- 135500
The Reciprocal method
S1 = 225.000 + (0.1 x S2) S2 = 72,000 • (0.1 x SI) SI = 225000 + [0.1 x ($72,000 +0.4 S1)] 0.96S1 = $232,200
S2 = 72,000 + (0.1 x 241.875)
S2 = 96,188 Production Departrnent 1 Production departrnent 2 Service Dept 1 cost allocation 241875 x 0-20 = 48375 241875 x 0.70 = 169313 Service Dept 2 cost al location 96188 x 0-30 = 28856 96188 x 0.60 = 57713 Add: Initial Production Dept Costs 59000 165000 Total Cost for Each Production Dept. 136231 392026 7-34 Direct Method Particulars Amount Department A D partment B e Design Department 90,000 (-) Allocated in the ratio 1 90,000 9,000 81,000 (Based on labor Hours used) Progamming Department 40,000
Allocated in the ratio 6:10 40,000 15,000 25,000
Total Cost: Department A - 24,000, Department B – 106,000
Step Method Particulars Amount Department Department Design Pr ogramming A B Total Costs 90.000 40,000 before allocation
Design 90,000 Department Allocated in 90,000 6,000 54,000 90,000 30,000 the ratio Based on labor Hours used Total Cost programming 6,000 54,000 70,000 Before allocating Programmin 70,000 g Department Allocated in (70,000) 26,250 43,150 (70,000) the ratio 600:1000 Total Cost 32,250 97 750 Reciprocal Method Design Total cost $90,000 + .2 Programming Total cost = 40,000 + .33 Design Total cost = $90,000 + .2 (40,000 + .33333 Design cost) Design Total cost = $90,000 + $8,000+ .066666 Design cost .933334 Design Total Cost = $98,000 Design total Cost = $105,000 Programming Total cost =$40,000 +.333333 * 104,925.078247 Programming Total cost = $75,000
7-35
Direct Method and Step method
Sourcing Operations Assembly Finishing Total
Overhead costs prior to allocation 165000 205,000 410,000 255,000 1,035,000 Sourcing department cost apportioned (165,000) 66,000 99,000 Operations department cost apportioned (205,000) 111818 93,182 Total overhead cost after reallocation 587,818 447,182 1,035,000
Sourcing Operations Assembly Finishing Total
Overhead costs prior to allocation 165,000 205,000 410,000 255,000 1,035,000 Sourcing department cost apportioned (1,165,000) 27,500 55,000 82,500 Operations department cost apportioned (232,000) 126,818 105,682 Total overhead cost after reallocation 591,818 443,182 1,035,000
7-36 1. Allocaion of Total Producton Dept. OutsidePnce Percentace based on Mantenance Outside Pnce Cost Using Outside Prices
A $115,000 25% $112500
B 92,000 20% 90.000 C 69,000 15% 67,500 D 184,000 40% 180,000 E $460,000 100% $450,000
2. The overall impact of the new strategy would be to encourage production departments to continue to use the internal maintenance supplier when the external price is high (as in Departments A and C) and to encourage those departments that have the potential to obtain relatively low external maintenance costs to do so (Departments B and D). The study offers a valuable framework for the organization to analyze why external maintenance costs vary so dramatically from what would be calculated on the basis of working hours. Perhaps a different basis of allocation, such as computer hours or floor space square feet.
Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studies that revealed the following inform... - HomeworkLib
Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studies that revealed the following inform... - HomeworkLib
