Question

1.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			50	%		0			10	%		40	%
Administration		10	%		0			20	%		50	%		20	%
Maintenance		0			20	%		0			20	%		60	%
Direct cost	$	22,000		$	193,300		$	25,000		$	180,000		$	50,000

  
Required:

Allocate the service department costs to the two operating departments using the reciprocal method

Engineering

Administration

Maintenance

2. GG Products, Inc., prepares tips and stems from a joint process using asparagus. It produced 250,000 units of tips having a sales value at the split-off point of $60,000. It produced 250,000 units of stems having a sales value at split-off of $40,000. Using the net realizable value method, the portion of the total joint product costs allocated to tips was $52,500.

Required:

Compute the total joint product costs before allocation. (Do not round intermediate calculations.)

Total Cost=

Answer 1

1)

Let the total cost of three service department be "

Engineering = X

Administration =Y

Maintenance =Z

	Engineering	Administration	Maintenance
E	0%	50% (Allocates 50% of total cost to Adm.dept )	0%
A	10%   (allocates 10% of total cost to Eng.Dept)	0%	20%   (Allocates 20% of total cost to Main.Dept)
M	0%	20%    (allocates 20% of total cost to Adm.Dept )	0%

Equation 1:

Total cost of Enginering department (X) = Direct cost +allocation from Administration department

                   X = 22000+ (y*10%)

Equation 2 :

Total cost of Administration department (Y) =Direct cost +Allocation from engineering dept +Allocation from maintenance department

Y = 193300 + (X* .50)+ (Z*.20)

Y = 193300 + .50X +.20 Z

Equation 3:

Total cost of maintenance department =Direct cost+ Allocation from admi.dept

                 Z = 25000 +.20Y

Putting the value of X and Z from equation 1 and 3 to equation 2

Y =193300 + [.50 * (22000+.10 Y) ] + [.20*(25000+.20Y)]

Y = 193300 + [(.50*22000)+(.50*.10Y)] +[(.20*25000)+(.20*.20Y)]

Y = 193300 + 11000+.05Y +5000 +.04Y

Y = 209300+.09Y

Y-.09Y = 209300

.91 Y= 209300

Y = 209300/.91

= 230000

Total cost of Administration department = 230000

No put the value of Y in equation 1 and 3

X= 22000+ (.10 *230000)

= 22000 + 23000

   =45000

Cost of maintenance department = 25000+ (230000*.20)

                          = 25000 +46000

                           = 71000

Allocation to production department

	Fabrication	Assembly
Direct cost	180000	50000
ENGINEERING	45000*10%=4500	45000*40%= 18000
Administration	230000*50%=115000	230000*20%= 46000
Maintenance	71000*20%= 14200	71000*60%= 42600
Total	313700	156600

2)

	TIPS	STEMS	TOTAL
Net realizable value	60000	40000	100000
Joint cost allocated	52500

Joint cost allocated to TIPS = (Net realizable value of TIPS/Total NRV )*total joint cost

52500 = (60000/100000) * total joint cost

52500 = .60 *total joint cost

total joint cost = 52500 /.60

          = $ 87500