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

Question

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:

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?

2) Assume that Titan Toys allocate the costs of support department costs to manufacturing departments using the step-down method. Calculate the manufacturing overhead rates for the Parts and Assembly departments?

3) Which method is preferable? Why?

Explanation / Answer

Solution 1:

Service department cost = Direct Cost + Allocated Cost

Material handling department cost = $100,000 + [50/100]* Power Generating department Cost

= $100,000 + 0.50*Power Generating department Cost

Power Generating Department Cost = $50,000 + [10/50]* Material handling department cost

= $50,000 + 0.20 * Material handling department cost

Power Generating Department Cost = $50,000 + 0.20 ($100,000 + 0.50*Power Generating Department Cost)

Power Generating Department Cost = $50,000 + $20,000 + 0.10*Power Generating Department Cost

Power Generating Department Cost = $70,000 / 0.90 = $77,778

Material handling department cost = $100,000 + 0.50*$77,778 = $138,889

Total machine hours in parts department = 25*2000 = 50000 machine hours

Direct labor hours in assemble department = 50*2000 = 100000 labor hours

Overhead rates parts department = $827,222 / 50000 = $16.54 per machine hour

Overhead rate assemble department = $672,778 / 100000 = $6.73 per labor hour

Solution 2.1:

Overhead rates parts department = $814,000 / 50000 = $16.28 per machine hour

Overhead rate assemble department = $686,000 / 100000 = $6.86 per labor hour

Solution 2.2:

Overhead rates parts department = $833,125 / 50000 = $16.66 per machine hour

Overhead rate assemble department = $666,875 / 100000 = $6.67 per labor hour

Solution 3:

The preferable method is reciprocal method as this method allocates cost of support department with each others in the proportion of support received. Thereafter cost is allocated to manufacturing departments. This method is complex but provide accurate results.

From Support Department Cost Allocation - Reciprocal Method Support Department Manufacturing Departments Material Handling Power Generating Parts Assembly Direct charges of department $100,000.00 $50,000.00 $750,000.00 $600,000.00 Material handling (10:25:15) -$138,889 $27,778 $69,445 $41,667 Power Generating (5:1:4) $38,889 -$77,778 $7,778 $31,111 Total $0 $0 $827,222 $672,778

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