Question

In: Accounting

Midland Resources has two production departments (Fabrication and Assembly) and three service departments (Engineering, Administration, and...

Midland Resources has two production departments (Fabrication and Assembly) and three service departments (Engineering, Administration, and Maintenance). During July, the following costs and service department usage ratios were recorded.

Supplying Department Using Department
Engineering Administration Maintenance Fabrication Assembly
Engineering 0 40 % 0 15 % 45 %
Administration 20 % 0 25 % 45 % 10 %
Maintenance 0 30 % 0 15 % 55 %
Direct cost $ 42,000 $ 248,550 $ 45,000 $ 230,000 $ 80,000


Required:

Allocate the service department costs to the two operating departments using the reciprocal method. (Matrix algebra is not required because there are only two service departments.) (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. Round your final answers to the nearest whole dollar amounts.)

Cost Allocation To:
From: Maintenance Personnel Printing Developing
Service department costs
Maintenance
Personnel
Total $0 $0 $0 $0

Solutions

Expert Solution

Answer:

The equations to calculate the values for administration, engineering and maintenance are as follows:

Administration = 248,550 + 40%*Engineering + 30%*Maintenance

Engineering = 42,000 + 20%*Administration

Maintenance = 45,000 + 25%*Administration

Now, we can substitute the equation for engineering and maintenance in the equation for administration, we get,

Administration = 248,550 + 40 %*( 42,000 + 20%*Administration) + 30%*(45,000 + 25%*Administration)

Solving equation, we get,

Administration = 248,550 + 16,800 + .08*Administration + 13,500 + .075*Administration

.845*Administration = 278,850

Administration = $330,000

Now, we can calculate the values for engineering and maintenance as follows:

Engineering = 42,000 + 20%*330,000 = $108,000

Maintenance = 45,000 + 25%*330,000 = $127,500

______

The cost allocation is given as below:

Costs

Fabrication

Assembly

Engineering

108,000

16,200 (108,000*15%)

48,600 (108,000*45%)

Administration

330,000

148,500 (330,000*45%)

33,000 (330,000*10%)

Maintenance

127,500

19,125 (127,500*15%)

63,750 (127,500*50%)

Total

$183,825

$145,350

ekkarill92 answered 2 years ago
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