THODS. Ajax Manufacturing has two support centers, Engi duction centers, Cutting
ID: 2571792 • Letter: T
Question
THODS. Ajax Manufacturing has two support centers, Engi duction centers, Cutting and Milling. The 5. ALLOCATION apartments, and their share of usage of support services, is center cent the coming year for the four de n the following table ers, Engineering overhead costs for d Accounting, and two Engineering $350,000 Accounting $250,000 10% Cutting $400,000 40% 35% Milling $600,000 50% 45% % Engineering Used % Accounting Used 20% charged to the two REQUIRED: a Determine the amount of Engineering and Accounting to b producing centers using direct allocation. etermine the amount of Engineering and Accounting to be charged to the two producing centers using sequential allocation. Determine the amount of Engineering and Accounting to be charged to the two producing centers using reciprocal allocation. b. D d. If Cutting works 4,000 hours a year and Milling 6,000 hours, what would be the overhead rate per hour worked under each of the three overhead charging schemes suggested above? e What allocation method should be used? Why?Explanation / Answer
a. Determine the amount of Engineering and Accounting to be charged to the two producing centres using direct allocation.
First we have to calculate the factors to apportion service department overheads:
Cutting
Milling
Total
Engineering
40
50
90
Accounting
35
45
80
Allocation of overheads
Cutting
Milling
Total
Engineering (in the ratio of 40:90)
$1,55,556
$1,94,444
$3,50,000
Accounting (in the ratio of 35:45)
$1,09,375
$1,40,625
$2,50,000
Total Amount allocated
$2,64,931
$3,35,069
$6,00,000
b. Determine the amount of Engineering and Accounting to be charged to the two producing centres using sequential allocation.
Allocation of overheads
Engineering
Accounting
Cutting
Milling
Total
Engineering (in the ratio of 10:40:90)
$35,000
$1,40,000
$1,75,000
$3,50,000
Accounting (in the ratio of 35:45)
-$35,000
$1,24,688
$1,60,313
$2,50,000
Total Amount allocated
$0
$2,64,688
$3,35,313
$6,00,000
c. Determine the amount of Engineering and Accounting to be charged to the two producing centres using reciprocal allocation.
Engineering department cost €
= $350,000 + 20% of Accounting department
Accounting department cost (A)
= $250,000 + 10% of Engineering department
E
= $350,000 + 20% A
= $350,000 + 20% ($250,000 + 10% E)
= $350,000 + $50,000 + 2% E
98% E
= $400,000
E
$4,08,163
A
= $250,000 + 10% of E
= $250,000 + 10% of $408,163
$2,90,816
Allocation of Overhead
Engineering
Accounting
Cutting
Milling
Total
Overheads
$3,50,000
$2,50,000
$4,00,000
$6,00,000
$16,00,000
Engineering (10:40:50)
-$4,08,163
$40,816.33
$1,63,265
$2,04,082
$0
Accounting (20:35:45)
$58,163.26
-$2,90,816
$1,01,786
$1,30,867
$0
Total
$0
$0
$6,65,051
$9,34,949
$16,00,000
d. If cutting works 4,000 hours a year and Milling 6,000 hours, what would be overhead rate per hour.
Computation of Overhead rates
Direct Allocation Method
Cutting
Milling
Total
Overhead incurred
$4,00,000
$6,00,000
$10,00,000
Overhead Allocated
$2,64,931
$3,35,069
$6,00,000
Total Amount allocated
$6,64,931
$9,35,069
$16,00,000
Hours worked
4,000
6,000
Overhead rate per hour
$166.23
$155.84
Computation of Overhead rates
Sequential Allocation Method
Cutting
Milling
Total
Overhead incurred
$4,00,000
$6,00,000
$10,00,000
Overhead Allocated
$2,64,688
$3,35,313
$6,00,000
Total Amount allocated
$6,64,688
$9,35,313
$16,00,000
Hours worked
4,000
6,000
Overhead rate per hour
$166.17
$155.89
Computation of Overhead rates
Reciprocal Allocation Method
Cutting
Milling
Total
Overhead incurred
$4,00,000
$6,00,000
$10,00,000
Overhead Allocated
$2,65,051
$3,34,949
$6,00,000
Total Amount allocated
$6,65,051
$9,34,949
$16,00,000
Hours worked
4,000
6,000
Overhead rate per hour
$166.26
$155.82
a. Determine the amount of Engineering and Accounting to be charged to the two producing centres using direct allocation.
First we have to calculate the factors to apportion service department overheads:
Cutting
Milling
Total
Engineering
40
50
90
Accounting
35
45
80
Allocation of overheads
Cutting
Milling
Total
Engineering (in the ratio of 40:90)
$1,55,556
$1,94,444
$3,50,000
Accounting (in the ratio of 35:45)
$1,09,375
$1,40,625
$2,50,000
Total Amount allocated
$2,64,931
$3,35,069
$6,00,000
b. Determine the amount of Engineering and Accounting to be charged to the two producing centres using sequential allocation.
Allocation of overheads
Engineering
Accounting
Cutting
Milling
Total
Engineering (in the ratio of 10:40:90)
$35,000
$1,40,000
$1,75,000
$3,50,000
Accounting (in the ratio of 35:45)
-$35,000
$1,24,688
$1,60,313
$2,50,000
Total Amount allocated
$0
$2,64,688
$3,35,313
$6,00,000
c. Determine the amount of Engineering and Accounting to be charged to the two producing centres using reciprocal allocation.
Engineering department cost €
= $350,000 + 20% of Accounting department
Accounting department cost (A)
= $250,000 + 10% of Engineering department
E
= $350,000 + 20% A
= $350,000 + 20% ($250,000 + 10% E)
= $350,000 + $50,000 + 2% E
98% E
= $400,000
E
$4,08,163
A
= $250,000 + 10% of E
= $250,000 + 10% of $408,163
$2,90,816
Allocation of Overhead
Engineering
Accounting
Cutting
Milling
Total
Overheads
$3,50,000
$2,50,000
$4,00,000
$6,00,000
$16,00,000
Engineering (10:40:50)
-$4,08,163
$40,816.33
$1,63,265
$2,04,082
$0
Accounting (20:35:45)
$58,163.26
-$2,90,816
$1,01,786
$1,30,867
$0
Total
$0
$0
$6,65,051
$9,34,949
$16,00,000
d. If cutting works 4,000 hours a year and Milling 6,000 hours, what would be overhead rate per hour.
Computation of Overhead rates
Direct Allocation Method
Cutting
Milling
Total
Overhead incurred
$4,00,000
$6,00,000
$10,00,000
Overhead Allocated
$2,64,931
$3,35,069
$6,00,000
Total Amount allocated
$6,64,931
$9,35,069
$16,00,000
Hours worked
4,000
6,000
Overhead rate per hour
$166.23
$155.84
Computation of Overhead rates
Sequential Allocation Method
Cutting
Milling
Total
Overhead incurred
$4,00,000
$6,00,000
$10,00,000
Overhead Allocated
$2,64,688
$3,35,313
$6,00,000
Total Amount allocated
$6,64,688
$9,35,313
$16,00,000
Hours worked
4,000
6,000
Overhead rate per hour
$166.17
$155.89
Computation of Overhead rates
Reciprocal Allocation Method
Cutting
Milling
Total
Overhead incurred
$4,00,000
$6,00,000
$10,00,000
Overhead Allocated
$2,65,051
$3,34,949
$6,00,000
Total Amount allocated
$6,65,051
$9,34,949
$16,00,000
Hours worked
4,000
6,000
Overhead rate per hour
$166.26
$155.82
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.