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 76 people. Each person in these two departments works 1,920 hours per year. The production-related overhead costs for the Molding Department are budgeted at $221,000, and the Assembly Department costs are budgeted at $91,000. Two support departments—Engineering and General Factory—directly support the two production departments and have budgeted costs of $234,000 and $377,000, 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	—	2,100	2,000	8,000
Square feet	123,690	—	418,190	47,120

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	$

3. Explain the difference between the methods, and indicate the arguments generally presented to support the reciprocal method over the direct allocation method. (CMA adapted)

Answer 1

	Molding	Assembly
No of employee	23	76
Multiplied by: Direct labor hour per employee	1920	1920
Total Direct labour hour	44,160	145,920

Answer 1		Direct allocation method
Department	Engineering	General Factory	Molding	Assembly
Direct cost	234,000.00	377,000.00	221,000.00	91,000.00
Engineering cost allocated to 2000:8000 respectively (2000+8000= 10000) (For molding = 234000*2000/10000	(234,000.00)		46,800.00	187,200.00
General Factory cost allocated to 418190:47120 respectively		(377,000.00)	338,822.78	38,177.22
Allocated overhead	-	-	606,622.78	316,377.22
Allocated overhead			606,623	316,377
Divided by Direct labour hour			44,160	145,920
Overhead rate per Direct labor hour			$          13.74	$            2.17

Answer 2		Reciprocal allocation method
Department	Engineering	General Factory	Molding	Assembly
Direct cost	234,000.00	377,000.00	221,000.00	91,000.00
Engineering cost allocated to 2100:2000:8000 respectively (2100+2000+8000= 12100) (For molding = 234000*2000/12100)	(234,000.00)	40,611.57	38,677.69	154,710.74
Total	-	417,611.57	259,677.69	245,710.74
General Factory cost allocated to 123690:418190:47120 respectively (123690+418190+47120 = 589000) (For molding = 417611.57*418190/589000)	87,698.43	(417,611.57)	296,504.21	33,408.93
Total	87,698.43	-	556,181.90	279,119.67
Engineering cost allocated to 2100:2000:8000 respectively	(87,698.43)	15,220.39	14,495.61	57,982.43
Total	-	15,220.39	570,677.51	337,102.10
General Factory cost allocated to 123690:418190:47120 respectively	3,196.28	(15,220.39)	10,806.48	1,217.63
Total	3,196.28	-	581,483.98	338,319.73
Engineering cost allocated to 2100:2000:8000 respectively	(3,196.28)	554.73	528.31	2,113.24
Total	-	554.73	582,012.30	340,432.98
General Factory cost allocated to 123690:418190:47120 respectively	116.49	(554.73)	393.86	44.38
Total	116.49	-	582,406.15	340,477.36
Engineering cost allocated to 2100:2000:8000 respectively	(116.49)	20.22	19.25	77.02
Total	-	20.22	582,425.41	340,554.38
General Factory cost allocated to 123690:418190:47120 respectively	4.25	(20.22)	14.35	1.62
Total	4.25	-	582,439.76	340,555.99
Engineering cost allocated to 2100:2000:8000 respectively	(4.25)	0.74	0.70	2.81
Total	-	0.74	582,440.46	340,558.80
General Factory cost allocated to 123690:418190:47120 respectively	0.15	(0.74)	0.52	0.06
Allocated overhead	0.15	-	582,440.99	340,558.86
Allocated overhead			582,441	340,559
Divided by Direct labour hour			44,160	145,920
Overhead rate per Direct labor hour			$          13.19	$            2.33

Under direct method, allocation of service department cost allocated to only production department.

Under reciprocal method, allocation of service department cost allocated to both production department and other service department.

Reciprocal method is better compare to direct method because it allocate overhead to all department who consumed service from allocated department.