In: Accounting
Caro Manufacturing has two production departments, Machining and Assembly, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of August follow: Proportion of Services Used by Department Direct Costs Maintenance Cafeteria Machining Assembly Machining $ 125,000 Assembly 84,000 Maintenance 52,000 — 0.2 0.5 0.3 Cafeteria 33,000 0.6 — 0.2 0.2 Required: Use the reciprocal method to allocate the service costs. (Matrix algebra is not required.) (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.)
The answer is:
From: | Maintenance | Cafetria | Machining | Assembly |
Service department costs | 52,000.00 | 33,000.00 | ||
Maintenance | - 81,591.00 | 16,318.00 | 40,796.00 | 24,477.00 |
Cafetria | 29,591.00 | - 49,318.00 | 9,864.00 | 9,864.00 |
Total | - | - | 50,660.00 | 34,341.00 |
Calculations and explanations:
We will first set up the equations:
Total service department service costs | = | Direct costs of the service department | + | Cost allocated to the service department |
S1 (maintenance) | = | 52,000.00 | + | 0.60S2 |
S2 (cafeteria) | = | 33,000.00 | + | 0.20S1 |
Thus S2 = 33,000+0.2*(52,000+0.60S2)
or S2 = 33,000+10,400+0.12S2
or S2 = 49,318
Thus S1 = 52,000+(0.6*49,318) = 81,591
Thus maintenance = 0.2*81,591 = 16318. 40,796 = 0.5*81591 and 24477 = 0.3*81591
Cafeteria: 29591 = 0.6*49318.
9864 = 0.2*49318