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 25 people, and the Assembly Department employs 75 people. Each person in these two departments works 1,940 hours per year. The production-related overhead costs for the Molding Department are budgeted at $180,000, and the Assembly Department costs are budgeted at $76,000. Two support departments—Engineering and General Factory—directly support the two production departments and have budgeted costs of $201,000 and $358,000, 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	1,800	8,200
Square feet	98,240	—	435,940	79,820

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

Macalister Corporation
1. Allocation of cost of service departments to the operating departments using the direct method
	To
From	Engineering	General Factory	Molding	Assembly
Department Costs	$                 201,000	$                 358,000	$                    180,000	$                   76,000
Engineering Allocation	$              (201,000)	$                            -	$                      36,180	$                 164,820
General Factory Allocation	$                            -	$              (358,000)	$                    302,595	$                   55,405
Total Cost	$                            -	$                            -	$                    518,775	$                 296,225
Overhead rate per DLH
			Molding	Assembly
Employees			25	75
Labour hours per employee			1,940	1,940
Total Labour Hours per year			48,500	145,500
Total Cost			$                    518,775	$                 296,225
Overhead rate per DLH			$                    10.6964	$                   2.0359
Calculations :
Engineering Allocation on the basis of engineering hours
	Engineering Hours	Cost Allocation	Calculation
Molding	1,800	36,180.00	(18/100*201,000)
Assembly	8,200	164,820.00	(82/100*201,000)
Total	10,000	201,000.00
General Factory Allocation on the basis of square feet
	Square Feet	Cost Allocation	Calculation
Molding	435,940	302,595.24	(435,940/515,760* 358,000)
Assembly	79,820	55,404.76	(79,820/515,760* 358,000)
Total	515,760	358,000.00
2. Allocation of cost of service departments to the operating departments using the reciprocal method
	To
From	Engineering	General Factory	Molding	Assembly
Department Costs	$                 201,000	$                 358,000	$                    180,000	$                   76,000
Engineering Allocation	$              (266,818)	$                   53,364	$                      38,422	$                 175,032
General Factory Allocation	$                   65,818	$              (411,364)	$                    292,068	$                   53,478
Total Cost	$                            -	$                            -	$                    510,490	$                 304,510
Overhead rate per DLH
			Molding	Assembly
Employees			25	75
Labour hours per employee			1,940	1,940
Total Labour Hours per year			48,500	145,500
Total Cost			$                    510,490	$                 304,510
Overhead rate per DLH			$                    10.5256	$                   2.0929
Calculations :
Let total engineering dept cost be x and total general factory cost be y
Total engineering dept Cost = Cost of engineering dept + Allocation of general factory dept
= 201000 + (98240/614000) * Cost of general factory dept
= 201000 + (98240/614000) * y
= 201000 + 0.16 y            …….(Equation 1)
Total general factory Cost = Cost of general factory dept + Allocation of engineering dept
= 358000 + (2500/12500) * Cost of engineering dept
= 358000 + (2500/12500) * x
= 358000 + 0.2 x            …….(Equation 2)
By putting value of general factory cost in equation 1
x	= 201000 + 0.16 y
x	= 201000 + 0.16 (358000 + 0.2x)
x	= 201000 + 57280 + 0.032x
x - 0.032x	= 201000 + 57280
0.968x	= 258280
x	= 258280/0.968
x	= 266818
General factory cost y	= 358000 + 0.2 (266818)
	= 411364
Engineering Allocation on the basis of engineering hours
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