Clyde and Co. has the following data from his service and production departments
ID: 2581966 • Letter: C
Question
Clyde and Co. has the following data from his service and production departments Service 1 is maintenance, incurs $20,000 of cost, and is driven by square feet Service 2 is tech support, incurs $15,000 of cost, and is driven by machine hours Production 1 is Cutting - Production 2 is Finishing Provider S1 S2 10 User S1 S2 P1 P2 20 40 30 45 65 Required - You are to determine how much of the $35,000 will be in each production department (P1 and P2) when they determine their departmental overhead rates. You need to do this under 4 approaches - direct, step (2 ways) and reciprocal. You should round to whole dollars and NOT worry if you are off a very few dollars.Explanation / Answer
Direct Method
Service 1 - Maintenance
Cost
$ 20,000
Total Square feet of all but S1
=40+30
70
sq feet
Cost per sq feet
$ 285.71
Allocation of Maintenance Expense
Maintenance
P1
P2
$ 20,000
$ 11,428.57
$ 8,571.43
Service 2 - Tech Support
Cost
$ 15,000
Total Machine hours of P1 and P2
=45+65
110
sq feet
Cost per sq feet
$ 136.36
Allocation of Maintenance Expense
Tech Support
P1
P2
$ 15,000
$ 6,136.36
$ 8,863.64
Cost Allocated
P1
P2
Maintenance Cost
$ 11,428.57
$ 8,571.43
Tech Support
$ 6,136.36
$ 8,863.64
Total
$ 17,564.94
$ 17,435.06
Step Method
Service 1 - Maintenance
Cost
$ 20,000
Total Square feet of all but S1
=20+40+30
90
sq feet
Cost per sq feet
$ 222.22
Allocation of Maintenance Expense
Maintenance
S2
P1
$ 20,000
$ 4,444.44
$ 8,888.89
Service 2 - Tech Support
Cost
$ 19,444
Total Machine hours of P1 and P2
=45+65
110
sq feet
Cost per sq feet
$ 176.77
Allocation of Maintenance Expense
Tech Support
P1
P2
$ 19,444
$ 7,954.55
$ 11,489.90
Cost Allocated
P1
P2
Maintenance Cost
$ 8,888.89
$ 6,666.67
Tech Support
$ 7,954.55
$ 11,489.90
Total
$ 16,843.43
$ 18,156.57
Reciprocal Method
Service 1 - Maintenance
$ 20,000
Service 2 - Tech Support
$ 15,000
S1
-
10
8.33%
S2
20
22.22%
-
P1
40
44.44%
45
37.50%
P2
30
33.33%
65
54.17%
90
120
Let total maintenance cost be A and total tech support cost be B
A = $20,000 + 8.33% B
B = $15,000 + 22.22% A
Replacing A in the above equation
B = $15,000 +22.22% ($20,000 + 8.33%B)
B = $19,811
A = $21,651
Cost Allocated
P1
P2
Maintenance Cost
$ 9,622.64
$ 7,216.98
Tech Support
$ 7,429.25
$ 10,731.13
Total
$ 17,051.89
$ 17,948.11
Direct Method
Service 1 - Maintenance
Cost
$ 20,000
Total Square feet of all but S1
=40+30
70
sq feet
Cost per sq feet
$ 285.71
Allocation of Maintenance Expense
Maintenance
P1
P2
$ 20,000
$ 11,428.57
$ 8,571.43
Service 2 - Tech Support
Cost
$ 15,000
Total Machine hours of P1 and P2
=45+65
110
sq feet
Cost per sq feet
$ 136.36
Allocation of Maintenance Expense
Tech Support
P1
P2
$ 15,000
$ 6,136.36
$ 8,863.64
Cost Allocated
P1
P2
Maintenance Cost
$ 11,428.57
$ 8,571.43
Tech Support
$ 6,136.36
$ 8,863.64
Total
$ 17,564.94
$ 17,435.06
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