Caro Manufacturing has two production departments, Machining and Assembly, and t

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 Total

Explanation / 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

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