Question

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

Answer 1

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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