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 23 people, and the Assembly Department employs 78 people. Each person in these two departments works 2,150 hours per year. The production-related overhead costs for the Molding Department are budgeted at $186,000, and the Assembly Department costs are budgeted at $84,000. Two support departments—Engineering and General Factory—directly support the two production departments and have budgeted costs of $204,000 and $370,000, 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	—	2,400	2,400	7,600
Square feet	101,340	—	377,210	84,450

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

Direct allocation Method	Molding	Assembly	Total
Engineering hours	2,400	7,600	10,000	A
Square feet	377,210	84,450	461,660	D
Overhead cost of Engineering			204,000.00	B
Overhead cost of per Engineering hour			20.40	C=B/A
Overhead cost- General Factory			370,000.00	E
Overhead cost per Square feet			0.80	F=E/D
Allocated Overhead cost- Engineering	48,960.00	155,040.00	204,000	G=C*A
Allocated Overhead cost- General Factory	302,317.00	67,683.00	370,000	H=F*D
Production related overhead costs	186,000.00	84,000.00	270,000	I
Total Overhead costs	537,277.00	306,723.00	844,000	J=G+H+I
Calculation of labor hours	Molding	Assembly	Total
No. of employees	23	78	101	K
Hours worked by each person	2,150	2,150	4,300	L
Total Direct Labor hours	49,450	167,700	217,150	M=K*L
Overhead rate per Direct Labor Hour	11.00	2.00		N=J/M
Overhead rate per DLH
Molding	11.0000
Assembly	2.0000
Reciprocal Allocation Method	Engineering	General Factory	Molding	Assembly	Total
Engineering hours	0	2400	2,400	7,600	12,400
% of Engineering hours	-	19.3548%	19.3548%	61.2903%	100%
Square feet	101340	0	377,210	84,450	563,000
% of Square feet	18.0000%	-	67.0000%	15.0000%	100%
Overhead cost	204,000.00	370,000.00	186,000.00	84,000.00	844,000.00
Let Overhead cost of Engineering department is $ X and Overhead cost of General Factory is $ Y
So, X= 204000+ 18% of Y	Equation 1
Y= 370000+ 19.3548 of X	Equation 2
Or, X= 204000+ .18Y
Y= 370000+ .193548X
Substituting the value of X in equation 2:
Y = 370,000 + 0.193548(204,000 + 0.18Y)	204,000.00	39,483.7920
Y = 370,000 + 39483.7920+.0348Y		0.0348
Y – 0.0348Y = 370,000 + 39483.7920		0.9652
0.9652Y = 409483.7920	409,483.79	409,483.79
Y = 409483.7920/0.9652	0.97	424,264.59
Y = $ 424,265	424,247.61	76,367.63
		204,000.00
Substituting the value of Y in equation 1:		280,367.63
X= 204000+ 18% of Y
X= 204000+ 18% 424265
X= 204000+ 18% 424265
X= $ 280,368
Allocation Summary
Reciprocal Allocation Method	Engineering	General Factory	Molding	Assembly	Total
Engineering hours	0	2400	2,400	7,600	12,400
% of Engineering hours	-	19.3548%	19.3548%	61.2904%	100%
Square feet	101340	0	377,210	84,450	563,000
% of Square feet	18.0000%	-	67.0000%	15.0000%	100%
Overhead cost	204,000.00	370,000.00	186,000.00	84,000.00	844,000.00
Allocation
Engineering (on the basis of % of Engineering hours)	(280,368.00)	54,265.00	54,265.00	171,839.00
General Factory (on the basis of % of Square feet)	76,368.00	(424,265.00)	284,258.00	63,640.00
Total	-	-	524,523.00	319,479.00	844,000.00
Total Direct Labor hours			49,450.00	167,700
Overhead rate per Direct Labor Hour			11.00	2.00
Overhead rate per Direct Labor Hour
Overhead rate per DLH
Molding	11
Assembly	2