In: Accounting
Robinson Products Company has two service departments (S1 and S2) and two production departments (P1 and P2). The distribution of each service department’s efforts (in percentages) to the other departments is:
TO
FROM | S1 | S2 | P1 | P2 |
S1 | - | 20% | 30% | ?% |
S2 | 20% | - | ? | 40% |
The direct operating costs of the departments (including both variable and fixed costs) are:
S1 | $ 220,000 |
S2 | $74,000 |
P1 | $ 61,000 |
P2 | $175,000 |
Required:
1. Determine the total cost of P1 and P2 using the direct method.
2. Determine the total cost of P1 and P2 using the step method.
3. Determine the total cost of P1 and P2 using the reciprocal method.
(Do not round intermediate calculations.).
***Please show all your work on how you get the answers in a working note. I would really need to understand this problem and how its solved. Please show me how you get all numbers if its not obvious from the information given. Thank you!***
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Robinson Products Company | ||||||
Data Provided | S 1 | S 2 | P 1 | P 2 | Total | |
S 1 | 0% | 20.00% | 30.00% | 50.00% | 100.00% | Share of P2 is calculated as 100% less shares of S2 and P1 i.e. 100% less 20% less 30%= 50%. |
S 2 | 20.00% | 0.00% | 40.00% | 40.00% | 100.00% | Share of P1 is calculated as 100% less shares of S1 and P2 i.e. 100% less 20% less 40%= 40%. |
Department cost | 220,000.00 | 74,000.00 | 61,000.00 | 175,000.00 | 530,000.00 |
Under direct method service department costs are allocated only to production department. For that we have to calculate the revised percentage. |
Direct Method | S 1 | S 2 | P 1 | P 2 | Total |
Current ratio | |||||
S 1 | 30.00% | 50.00% | 80.00% | ||
S 2 | 40.00% | 40.00% | 80.00% | ||
Revised percentage for direct method | |||||
S 1 | 37.50% | 62.50% | 100.00% | ||
S 2 | 50.00% | 50.00% | 100.00% | ||
Department cost | 220,000.00 | 74,000.00 | 61,000.00 | 175,000.00 | 530,000.00 |
S 1 | (220,000.00) | 82,500.00 | 137,500.00 | - | |
S 2 | (74,000.00) | 37,000.00 | 37,000.00 | - | |
Dept. cost after allocation | - | - | 180,500.00 | 349,500.00 | 530,000.00 |
Under step method service department with highest cost will be allocated first i.e. S 1 in this case and then next department: |
Step Method | S 1 | S 2 | P 1 | P 2 | Total |
S 1- use % given in question. | 0% | 20% | 30% | 50% | 100.00% |
Department cost | 220,000.00 | 74,000.00 | 61,000.00 | 175,000.00 | 530,000.00 |
S 1 | (220,000.00) | 44,000.00 | 66,000.00 | 110,000.00 | - |
Department cost after allocation | - | 118,000.00 | 127,000.00 | 285,000.00 | 530,000.00 |
S 2- use % calculated in direct method | 50.00% | 50.00% | 100.00% | ||
Allocation | - | (118,000.00) | 59,000.00 | 59,000.00 | - |
Dept. cost after allocation | - | - | 186,000.00 | 344,000.00 | 530,000.00 |
Reciprocal Method | S 1 | S 2 | P 1 | P 2 | Total |
S 1 | 0.00% | 20.00% | 30.00% | 50.00% | 100.00% |
S 2 | 20.00% | 0.00% | 40.00% | 40.00% | 100.00% |
Department cost | 220,000.00 | 74,000.00 | 61,000.00 | 175,000.00 | 530,000.00 |
Let cost of S 1 is $ X and S 2 is $ Y | |
So, X= 220000+ 20% of Y | Equation 1 |
Y= 74000+ 20% of X | Equation 2 |
Or, X= 220000+ 0.20Y | |
Y= 74000+ 0.20X |
Substituting the value of X in equation 2: |
Y = 74000 + 0.20(220,000 + 0.20Y) |
Y = 74000 + 44000+.04Y |
Y – 0.04Y = 74,000+44,000 |
0.96Y = 118,000 |
Y = 118,000/.96 |
Y = $ 122,917 |
Substituting the value of Y in equation 1: |
So, X= 220000+ .20Y |
So, X= 220000+ 0.20*122917 |
So, X= 220000+ 24583 |
X= $ 244,583 |
Allocation Summary | S 1 | S 2 | P 1 | P 2 | Total |
S 1 | - | 20.00% | 30.00% | 50.00% | 100.00% |
S 2 | 20.00% | - | 40.00% | 40.00% | 100.00% |
Direct costs | 220,000.00 | 74,000.00 | 61,000.00 | 175,000.00 | 530,000.00 |
Allocation | |||||
S 1 | (244,583.00) | 48,916.60 | 73,374.90 | 122,291.50 | - |
S 2 | 24,583.40 | (122,917.00) | 49,166.80 | 49,166.80 | - |
Department cost after allocation | 0.40 | (0.40) | 183,541.70 | 346,458.30 | 530,000.00 |