Question 2: Titan Toy Case (Departmental method: reciprocal vs step-down method)

Question

Question 2: Titan Toy Case (Departmental method: reciprocal vs step-down method) Titan Toys Company Ltd manufactures two types of toy cars: Racing Devils and Maximus Demons. Titan Toys has two manufacturing departments: The Parts Department manufacture the various toy car components and the Assembly Department assembles the toy cars. Titan Toys is developing departmental overhead rates based on machine hours for its Parts Department and labour hours for Assembly Department. The Parts Department has 25 machines, each of which runs 2,000 hours per year. The assembly department has 50 employees. Each employee works 2,000 hours per year. The budgeted overhead costs for the Parts and Assembly departments are as follows: Budgeted Overhead Costs Parts Department Assembly Department 750,000 600,000 Titan Toys has two support departments: Materials Handling department (Materials) and Power-generating department (Power). The budgeted costs for the Materials and Power departments are as follows: Materials Handling Department Power-generating Department Budgeted Costs 100,000 50,000 The manufacturing departments' overhead rates cannot be determined until the support departments' costs are allocated. The following schedule reflects the use of the Materials Department's and Power Department's output by the various departments. Used B Supplied by Materials (direct labour hours) Power (kilowatt-hours) Power 100 Parts 250 100 Assembly 150 400 Materials 500 Required 1) Assume that Titan Toys allocates the costs of support departments to manufacturing departments using the reciprocal method. Calculate the manufacturing overhead rates for the Parts and Assembly departments?

Explanation / Answer

1)% of cost of material allocated to power : 100/ 500= .20                     [100+250+150]

% of cost of power allocated to material : 500/1000 = .50                        [500+100+400]

Let the total cost of Material be "X" and total cost of power be "Y"

X = 100000+[Y*.50]

   = 100000+.50Y                             [Equation 1]

Y = 50000+ [X *.20]

Y= 50000+.20X          [Putting the vaue of X in this equation from eq1]

Y= 50000 + [.20 (100000+.50Y)]

   = 50000+ [20000+.01 Y]

   = 70000 + .01Y

Y- .01Y = 70000

.99 Y = 70000

   Y = 70000/.99 = 70707    [(ROUNDED)

Total Cost of power =70707.

Total cost of material : 100000+.50(70707)

                = 135354

Total cost to alocated to Parts Assembly 750000 600000 Material 135354 in 250:150 84596.25     [135354*250/400] 50757.75 Power 70707 in 100:400 14141.4        [70707*100/500] 56565.6    [70707*400/500] Total cost A 848737.65 707323.35 Allocation base B 25*2000=50000 50*2000=100000 Overhead rate A/B 16.97 per MH 7.07 per DLH

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