Management Accounting Question. Please make sure to do all 3 methods mentioned.

Question

Management Accounting Question.

Please make sure to do all 3 methods mentioned. 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

Solution :

Reciprocal Method:

Service department cost = Direct Cost + Allocated Cost

Payroll Department Cost = $600,000 + [800 /4000]* IT Cost

= $600,000 + 0.20*IT Cost

IT Department Cost = $232,000 + [1600 /16000]* Payroll cost

= $232,000 + 0.10 * Payroll Cost

IT Cost = $232,000 + 0.10 ($600,000 + 0.20*IT Cost)

IT Cost = $232,000 + $60,000 + 0.02*IT Cost

IT Cost = $292,000 / 0.98 = $297,959

Payroll Cost = $600,000 + 0.20*$297,959 = $659,592

From Service Department Cost Allocation - Direct Method Service Department Production Departments Payroll IT Machining Assembly Direct charges of department $600,000 $232,000 $600,000 $400,000 Payroll (4000:10400) -$600,000 $166,667 $433,333 IT (2000:1200) -$232,000 $145,000 $87,000 Total $0 $0 $911,667 $920,333

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