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 19 people, and the Assembly Department employs 75 people. Each person in these two departments works 2,180 hours per year. The production-related overhead costs for the Molding Department are budgeted at $198,000, and the Assembly Department costs are budgeted at $73,000. Two support departments—Engineering and General Factory—directly support the two production departments and have budgeted costs of $206,000 and $395,000, 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 2,400 7,600   
Square feet 95,850     — 447,300 95,850   

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)

The reciprocal allocation method is preferred because it recognizes that all support departments serve one another.

Answer 1

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you.
		Molding	Assembly
Employee	A	19	75
Hours	B	2180	2180
Toal Labor Hours	A*B	41420	163500
		Engineering	Gen Factory	Molding	Assembly	Total
Budgeted Overheads		$       206,000	$       395,000	$       198,000	$         73,000	$ 872,000
Engineering Hours			2100	2400	7600	$   12,100
Square Feet		95850		447300	95850	$ 639,000
Weights for Direct Method
Engineering Hours				24.00%	76.00%
Square Feet				82.35%	17.65%
Weightes for reciperocal
Engineering Hours%			17.36%	19.83%	62.81%
Square Feet%		15.00%		70.00%	15.00%
1. Direct Method Allocation:
		Engineering	Gen Factory	Molding	Assembly	Total
Budgeted Overheads		$       206,000	$       395,000	$       198,000	$         73,000	$ 872,000
Engineering		$     -206,000		$         49,440	$       156,560	$            -
Gen Factory			$     -395,000	$       325,294	$         69,706	$            -
Total Overhead	a			$       572,734	$       299,266
Direct Labor Hours	b			41420	163500
Overhead Per DLH	a/b			$            13.83	$              1.83
1. Reciperocal Method Allocation:
Engineering	206000+0.15Gen Factory
Gen Factory	395000+0.1736Engineering
Engineering	206000+0.15(395000+0.1736Engineering)
Engineering	206000+59250+0.02604Engineering
0.97396 Engineering	265250
Engineering	$                                    272,342
Gen Factory	395000+0.1736Engineering
Gen Factory	395000+(0.1736*272342)
Gen Factory	$                                    442,264	R/Off Gap
		Engineering	Gen Factory	Molding	Assembly	Total
Budgeted Overheads		$       206,000	$       395,000	$       198,000	$         73,000	$ 872,000
Engineering		$     -272,342	$         47,266	$         54,018	$       171,058	$            -
Gen Factory		$         66,340	$     -442,264	$       309,585	$         66,340	$            -
Total Overhead	a			$       561,603	$       310,397
Direct Labor Hours	b			41420	163500
Overhead Per DLH	a/b			$            13.56	$              1.90
Part -3
The major advantage of reciprocal method is that it fully takes into account the interdepartmental services
and is therefore considered a more accurate method than direct and step method for departmental cost allocation.