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Direct Method, Reciprocal Method, Overhead Rates Macalister Corporation is developing departmental overhead rates based on direct...

Direct Method, Reciprocal Method, Overhead Rates

Macalister Corporation is developing departmental overhead rates based on direct labor hours for its two production departments—Molding and Assembly. The Molding Department employs 19 people, and the Assembly Department employs 75 people. Each person in these two departments works 1,910 hours per year. The production-related overhead costs for the Molding Department are budgeted at $239,000, and the Assembly Department costs are budgeted at $99,000. Two support departments—Engineering and General Factory—directly support the two production departments and have budgeted costs of $221,000 and $379,000, respectively. The production departments’ overhead rates cannot be determined until the support departments’ costs are properly allocated. The following schedule reflects the use of the Engineering Department’s and General Factory Department’s output by the various departments.

Engineering General Factory Molding Assembly
Engineering hours —     2,500 2,200 7,800   
Square feet 88,200     388,080 111,720   

For all requirements, round allocation ratios to four significant digits and round allocated costs to the nearest dollar.

Required:

1. Calculate the overhead rates per direct labor hour for the Molding Department and the Assembly Department using the direct allocation method to charge the production departments for support department costs. Round final answers to the nearest cent.

Overhead rate per DLH
Molding
Assembly

2. Calculate the overhead rates per direct labor hour for the Molding Department and the Assembly Department using the reciprocal method to charge support department costs to each other and to the production departments. Round final answers to the nearest cent. Round your intermediate calculations to four decimal places.

Overhead rate per DLH
Molding
Assembly

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Macalister Corporation
Calculation of direct labor hours Molding Assembly
Number of employees                  19.00                    75.00
Labor hours worked each employee            1,910.00              1,910.00
Total Labor hours          36,290.00         143,250.00
Direct Method Engineering General Factory Molding Assembly Total
Engineering hours               2,200.00            7,800.00         10,000.00
Engineering hours % 22.00% 78.00% 100.00%
Square Feet           388,080.00       111,720.00       499,800.00
Square Feet % 77.65% 22.35% 100.00%
Total costs       221,000.00         379,000.00           239,000.00         99,000.00       938,000.00
Engineering cost to be allocated- Engineering hours %      (221,000.00)             48,620.00       172,380.00                        -  
General Factory cost to be allocated- Square feet Employees %        (379,000.00)           294,282.00         84,718.00                        -  
Total cost after allocation                        -                            -             581,902.00       356,098.00       938,000.00
Total Labor Hours             36,290.00       143,250.00
Overhead rate per DLH                     16.03                   2.49
Reciprocal Method Engineering General Factory Molding Assembly Total
Engineering hours              2,500.00               2,200.00            7,800.00         12,500.00
Square Feet          88,200.00           388,080.00       111,720.00       588,000.00
Engineering hours % 20.00% 17.60% 62.40% 100.00%
Square Feet % 15.00% 66.00% 19.00% 100.00%
Total costs       221,000.00         379,000.00           239,000.00         99,000.00       938,000.00
Let cost of Engineering is $ X and General Factory is $ Y
So, X= 221000+ 15% of Y
So, X= 221000+ 0.15Y
Y= 379000+ 20% of X
Y= 379000+ 0.20X
Substituting the value of X in equation 2:
Y = 379-00 + 0.20(221000 + 0.15Y)
Y = 379000 + 44200+.03Y
Y – 0.03Y = 379000+44200
0.97 = 423,200
Y = 423,200/0.97
Y = $ 436,289
Substituting the value of Y in equation 1:
So, X= 221000+ 0.15Y
So, X= 221000+ 0.15*436289
So, X= 221000+ 65443
X= $ 286,443
Allocation Summary Engineering General Factory Molding Assembly Total
Engineering hours %                        -   20.00% 17.60% 62.40% 100.00%
Square Feet % 15.00%                          -   66.00% 19.00% 100.00%
Department cost       221,000.00         379,000.00           239,000.00         99,000.00       938,000.00
Total costs
Engineering      (286,443.00)            57,289.00             50,414.00       178,740.00                        -  
General Factory          65,443.00        (436,289.00)           287,951.00         82,895.00                        -  
Cost after allocation                        -                            -             577,365.00       360,635.00       938,000.00
Labor Hours             36,290.00       143,250.00
Overhead rate per DLH                     15.91                   2.52

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