There are 3 methods that need to be used to calculate the costs allocated. But I
ID: 2336500 • Letter: T
Question
There are 3 methods that need to be used to calculate the costs allocated.
But I am not sure which is which.
Please show me all the work as well!
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
Dye Engineering
Service Department Cost Allocation
Allocation of service department costs
Direct Method
Service Departments
Production Departments
Payroll
IT
Machining
Assembly
Department Costs
$600,000
$232,000
$600,000
$400,000
Payroll Allocation
($600,000)
$166,667
$433,333
IT Allocation
($232,000)
$145,000
$87,000
Total
$911,667
$920,333
payroll - allocation rate for production departments
total hours spent for machining and assembly
4,000 DLH + 10,400 DLH = 14,400 DLH
Allocation rate = $600,000/14,400 DLH = $41.67
Payroll to Machining
4,000 x $41.67 = $166,667
Payroll to Assembly
10,400 x $41.67 = $433,333
IT - allocation rate for production departments
Total hours
2,000 H + 1,200 H = 3,200 H
allocation rate = $232,000/3,200 H = $72.50
IT to Machining
2,000 x $72.50 = $145,000
IT to Assembly
1,200 x $72.50 = $87,000
Allocation of service department costs
Step Down Method
Service Departments
Production Departments
Payroll
IT
Machining
Assembly
Department Costs
$600,000
$232,000
$600,000
$400,000
Payroll Allocation
($600,000)
$60,000
$150,000
$390,000
IT Allocation
($292,000)
$182,500
$109,500
Total
$932,500
$899,500
payroll - allocation rate for IT and two production departments
total hours spent for IT, machining and assembly
1,600 DLH 4,000 DLH + 10,400 DLH = 16,000 DLH
Allocation rate = $600,000/16,000 DLH = $37.5
Payroll to Machining
4000 x $37.50 = $150,000
Payroll to Assembly
10,400 x $37.5 = $390,000
Payroll to IT
1,600 x $37.50 = $60,000
IT - allocation rate two production departments
Total hours
2,000 H + 1,200 H = 3,200 H
allocation rate = ($232,000 + $60,000)/3,200 H = $91.25
IT to Machining
2,000 x $91.25 = $182,500
IT to Assembly
1,200 x $91.25 = $109,400
Service Departments
Production Departments
Department
Payroll
IT
Machining
Assembly
Costs
$600,000
$232,000
$600,000
$400,000
Payroll cost allocated
($659,592)
$65,959
$164,898
$428,735
IT cost allocation
$59,592
($297,959)
$148,979
$89,388
Total costs
$0
$0
$913,877
$918,123
First the usage percentage to each service and production department is determined as follows,
Payroll
Direct labor hours
Percentage
Machining
4,000
25%
Assembly
10,400
65%
IT
1,600
10%
Total
16,000
100%
IT
Direct labor hours
Percentage
Machining
2,000
50%
Assembly
1,200
30%
Payroll
800
20%
4,000
100%
Make equations using the above usage percentages as follows,
Total Payroll cost = Payroll cost + 20% of total IT cost
P = $600,000 + 20% of IT-----Eq 1.
Total IT cost = IT cost + 10% of total Payroll cost
IT = $232,000 + 10% of P -----Eq 2.
Substituting the values of Eq 1. In Eq. 2, we have
IT = $232,000 + 10% ($600,000 + 20% IT)
IT = $232,000 + $60,000 + 0.02 IT
0.98 IT = $292,000
Total IT cost = $292,000/0.98 = $297,959
IT Cost allocated to Payroll = $297,959 x 20% = $59,592
Substituting the total IT cost in equation 1,
P = $600,000 + 20% of $297,959
P = $600,000 + $59,592 = $659,592
Total payroll cost, P = $659,592
Cost allocated to IT = 10%P
Payroll cost allocated to IT = $659,592 x 10% = $65,959
Allocation of service department costs
Direct Method
Service Departments
Production Departments
Payroll
IT
Machining
Assembly
Department Costs
$600,000
$232,000
$600,000
$400,000
Payroll Allocation
($600,000)
$166,667
$433,333
IT Allocation
($232,000)
$145,000
$87,000
Total
$911,667
$920,333
payroll - allocation rate for production departments
total hours spent for machining and assembly
4,000 DLH + 10,400 DLH = 14,400 DLH
Allocation rate = $600,000/14,400 DLH = $41.67
Payroll to Machining
4,000 x $41.67 = $166,667
Payroll to Assembly
10,400 x $41.67 = $433,333
IT - allocation rate for production departments
Total hours
2,000 H + 1,200 H = 3,200 H
allocation rate = $232,000/3,200 H = $72.50
IT to Machining
2,000 x $72.50 = $145,000
IT to Assembly
1,200 x $72.50 = $87,000
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