Question

Support department cost allocation—reciprocal services method

Davis Snowflake & Co. produces Christmas stockings in its Cutting and Sewing departments. The Maintenance and Security departments support the production of the stockings. Costs from the Maintenance Department are allocated based on machine hours, and costs from the Security Department are allocated based on asset value. Information about each department is provided in the following table:

	Maintenance Department	Security Department	Cutting Department	Sewing Department
Machine hours	800	2,000	7,200	10,800
Asset value	$2,000	$1,460	$2,000	$6,000
Department cost	$28,800	$12,800	$64,000	$83,000

Determine the total cost of each production department after allocating all support department costs to the production departments using the reciprocal services method.

	Cutting Department		Sewing Department
Production departmentsʼ total costs	$fill in the blank 1		$fill in the blank 2

Answer 1

Solution:

On Solving Both Equation:

MD = $28,800 + 0.2 SD                        (1)

SD = $12,800 + 0.1 MD                        (2)

SD = $12,800 + 0.1 ($28,800 + 0.2 SD)

SD = $12,800 + $2,880 + 0.02 SD

0.98 SD = $15,680

SD = $16,000

And MD = $28,800 + 0.2 SD

MD = $28,800 + 0.2 * $16,000

MD = $32,000