Question

Comparison of Methods of Allocation

Duweynie Pottery, Inc., is divided into two operating divisions: Pottery and Retail. The company allocates Power and General Factory department costs to each operating division. Power costs are allocated on the basis of the number of machine hours and general factory costs on the basis of square footage. No effort is made to separate fixed and variable costs; however, only budgeted costs are allocated. Allocations for the coming year are based on the following data: Use the rounded values for subsequent calculations.

	Support Departments				Operating Divisions
	Power		General Factory		Pottery		Retail
Overhead costs	$150,000		$162,000		$97,000		$58,000
Machine hours	2,000		2,500		7,000		3,000
Square footage	2,500		1,700		4,000		6,000

Round all allocation ratios to four significant digits. Round all allocated amounts to the nearest dollar.

Required:

1. Allocate the support service costs using the direct method.

Note: Input to two decimal places.

2. Allocate the support service costs using the sequential method. The support departments are ranked in order of highest cost to lowest cost.

Note: If an amount is zero, enter "0". Input to two decimal places.

3. Allocate the support service costs using the reciprocal method.

Note: If an amount is zero, enter "0". Input to two decimal places.

Answer 1

1) The direct method:
	Support departments		Operating divisions			Allocation base
	Power	Gen Factory	Pottery	Retail
Overhead costs	150000	162000	97000	58000
Allocation of overhead:
Power	-150000		105000	45000		(7:3)
Gen Factory		-162000	64800	97200		(4:6)
Total	0	0	266800	200200
2) Sequential method:
	Support departments		Operating divisions			Allocation base
	Power	Gen Factory	Pottery	Retail
Overhead costs	150000	162000	97000	58000
Allocation of overhead:
Power	-150000	30000	84000	36000		(2.5:7:3)
balance	0	192000	181000	94000
Allocation of overhead:
Gen Factory		-192000	76800	115200		(4:6)
Total	0	0	257800	209200
3) Reciprocal method:
	Support departments		Operating divisions			Allocation base
	Power	Gen Factory	Pottery	Retail
Overhead costs	150000	162000	97000	58000
Allocation of overhead:
Power	-150000	30000	84000	36000		(2.5:7:3)
Gen Factory	32400	-162000	51840	77760		(2.5:4:6)
Balance before reciprocal	32400	30000	232840	171760
Reciprocal allocation:
Power	-32400		22680	9720		(7:3)
Gen Factory		-30000	12000	18000		(4:6)
Total	0	0	267520	199480