Question

Logan Products has two production departments—assembly and finishing. These are supported by two service departments—sourcing (purchasing and handling of materials and human resources) and operations (work scheduling, supervision, and inspection). Logan has the following labor hours devoted by each of the service departments to the other departments. Total Labor Hours Used by Departments Sourcing Operations Assembly Finishing Sourcing - 20,000 40,000 60,000 Operations 10,000 - 60,000 50,000 The costs incurred in the plant are as follows: Departments Departmental Costs Sourcing $ 180,000 Operations 230,000 Assembly 420,000 Finishing 265,000 Total $ 1,095,000 Required: Use four decimal places (e.g., 33.3333%) in your calculation of percentages. 1. What are the costs allocated to the two production departments using (a) the direct method, (b) the step method, when the sourcing department that provides the greatest percentage of services to other service departments goes first), and (c) the reciprocal method? 2. What are the total costs in the production departments after allocation? (For all requirements, do not round intermediate calculations. Round your final answer to nearest whole dollar amount.)

Answer 1

Direct Method
Ratio of apportionment of sourcing departments cost to assembly and finishing = 40000 : 60000 = 2 : 3
Ratio of apportionment of Operations departments cost to assembly and finishing = 60000 : 50000 = 6 : 5
	Sourcing	Operations	Assembly	Finishing	Total
Overhead costs prior to allocation	$        1,80,000	$   2,30,000	$ 4,20,000	$ 2,65,000	$1,095,000
Sourcing department cost apportioned	$      -1,80,000		$72,000	$108,000
Opearations department cost apportioned		$ -2,30,000	$125,455	$104,545
Total overhead cost after reallocation	$0	$0	$197,455	$212,545	$1,095,000
Step Method
Ratio of apportionment of sourcing departments cost to Operations, assembly and finishing =20000: 40000 : 60000 = 1 : 2 : 3
Ratio of apportionment of Operations departments cost to assembly and finishing = 60000 : 50000 = 6 : 5
	Sourcing	Operations	Assembly	Finishing	Total
Overhead costs prior to allocation	$        1,80,000	$   2,30,000	$ 4,20,000	$ 2,65,000	1095000.00
Sourcing department cost apportioned	$      -1,80,000	$      30,000	$     60,000	$     90,000
Opearations department cost apportioned		$ -2,60,000	$     1,41,818.2	$     1,18,181.8
Total overhead cost after reallocation			$     6,21,818.2	$ 4,73,181.8	$ 10,95,000
Reciprocal Method
Let, S and O are the variables that represent the total costs to allocate from Sourcing and Operations department respectively
2/12 = 1/6 of the sourcing hours are being used by the operations department
1/12 of the operations hours are being used by the sourcing department
The equations for total cost to be apportioned for the service departments are:
S = 180000 + O/12
O = 230000 + S/6
Solving the above equations we get
S = $202625
O = $ 264528
	Sourcing	Operations	Assembly	Finishing	Total
Overhead costs prior to allocation	$        1,80,000	$   2,30,000	$ 4,20,000	$ 2,65,000	$ 10,95,000
Sourcing department cost apportioned	$      -2,02,625	$      34,528	$     67,237	$     1,00,860
Opearations department cost apportioned	$            22,625	$ -2,64,528	$ 1,31,948	$     1,09,955
Total overhead cost after reallocation			$ 6,19,185	$ 4,75,815	$ 10,95,000