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 $ 186,000 Operations 240,000 Assembly 424,000 Finishing 269,000 Total $ 1,119,000 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

Solution 1a:

From	Service Department Cost Allocation - Direct Method
	Service Department		Production Departments
	Sourcing	Operations	Assembly	Finishing
Direct charges of department	$186,000.00	$240,000.00	$424,000	$269,000
Souring (2:3)	-$186,000.00		$74,400	$111,600
Operations (6:5)		-$240,000.00	$130,909	$109,091
Total	$0.00	$0.00	$629,309	$489,691

Solution 1b:

From	Service Department Cost Allocation - Step Method (Allocation of Sourcing first)
	Service Department		Production Departments
	Sourcing	Operations	Assembly	Finishing
Direct charges of department	$186,000.00	$240,000.00	$424,000	$269,000
Souring (1:2:3)	-$186,000.00	$31,000.00	$62,000	$93,000
Operations (6:5)		-$271,000.00	$147,818	$123,182
Total	$0.00	$0.00	$633,818	$485,182

Solution 1c:

Service department cost = Direct Cost + Allocated Cost

Sourcing Department Cost = $186,000 + [1/12]* Operations Cost

Operations Cost = $240,000 + 1/6* Sourcing Cost

Operations Cost = $240,000 + 1/6 ($186,000 + 1/12*operations Cost)

Operations Cost = $240,000 + $31,000 + 0.013888888*operations Cost

Operations Cost = $271,000 / 0.9766 = $274,817

Sourcing Cost = $186,000 + 1/12*$274,817 = $208,901

From	Service Department Cost Allocation - Reciprocal Method
	Service Department		Production Departments
	Sourcing	Operations	Assembly	Finishing
Direct charges of department	$186,000	$240,000	$424,000	$269,000
Souring (1:2:3)	-$208,901	$34,817	$69,634	$104,451
Operations (1:6:5)	$22,901	-$274,817	$137,409	$114,507
Total	$0	$0	$631,042	$487,958

Solution 2:

total costs in the production departments after allocation = $1,119,000