Question

Caro Manufacturing has two production departments, Machining and Assembly, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of August follow:

				Proportion of Services Used by
Department	Direct Costs			Maintenance		Cafeteria		Machining		Assembly
Machining	$	105,000
Assembly		76,400
Maintenance		47,200		—		0.2		0.6		0.2
Cafeteria		38,000		0.8		—		0.1		0.1

Assume that both Machining and Assembly work on just two jobs during the month of August: CM-22 and CM-23. Costs are allocated to jobs based on machine-hours in Machining and labor-hours in Assembly. The number of labor- and machine-hours worked in each department are as follows:

		Machining		Assembly
Job CM-22:	Machine-hours	190		20
	Labor-hours	20		60
Job CM-23:	Machine-hours	50		50
	Labor-hours	40		120

Required:
How much of the service department costs allocated to Machining and Assembly in the direct method should be allocated to Job CM-22? How much should be allocated to Job CM-23? (Round "Department rate" to 2 decimal places.)

Answer 1

• All working forms part of the answer
• Step 1: Allocation of Service Department costs using DIRECT METHOD

Ratios total for allocation:

--Maintenance = 0.6 + 0.2 = 0.8

--Cafetaria = 0.1 + 0.1 = 0.2

Department	Supplying (Service Department)		Using Department
	Maintenance	Cafetaria	Machining	Assembly
Direct Costs	$           47,200.00	$              38,000.00	$          105,000.00	$                  76,400.00
Allocation of:
Maintenance	$        (47,200.00)		$             35,400.00 [47200 x 0.6/0.8]	$                  11,800.00 [47200 x 0.2/0.8]
Cafetaria		$            (38,000.00)	$             19,000.00 [38000 x 0.1/0.2]	$                  19,000.00 [38000 x 0.1/0.2]
Total cost after allocation have been made	$                          -	$                              -	$          159,400.00	$                107,200.00

• Step: Calculation of Allocation bases [Machine hours and Labor Hours]

	Jobs
	CM 22	CM 23	Total
Machine hours in Machining Department	190	50	240 machine hours
Labor hours in Assembly Department	60	120	180 labor hours

• Step 3: Calculation of Departmental rates

Working		Machining	Assembly
A	Cost after above Step 1 Allocation	$        159,400.00	$      107,200.00
B	Total no. of hours	240	180
C = A/B	Departmental rates	$                664.17	$               595.56

• Step 4: Allocation of Cost to Jobs

Job CM 22
Machining Department Cost	$ 126,192.30	[190 machine hours x $ 664.17]
Assembly Department Cost	$    35,733.60	[60 labor hours x $ 595.56]
Total	$ 161,925.90

Job CM 23
Machining Department Cost	$    33,208.50	[50 machine hours x $ 664.17]
Assembly Department Cost	$    71,467.20	[120 labor hours x $ 595.56]
Total	$ 104,675.70

• Answers

Service Department Cost allocated to Job CM 22 = $ 161,925.90 or $ 161,926

Service Department Cost allocated to job CM 23 = $ 104,675.70 or $ 104,676