Question

1. 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	$140,400		$181,200		$96,000		$56,000
   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.

   Allocation Ratios	Pottery	Retail
   Proportion of machine hours
   Proportion of square footage

   Cost Allocations	Pottery	Retail
   Power	$	$
   General Factory
   Direct costs
   	$	$

   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.

   Allocation Ratios	Power	General Factory	Pottery	Retail
   Machine hours
   Square footage

   Cost Allocations	Power	General Factory	Pottery	Retail
   Direct costs	$	$	$	$
   General Factory
   Power
   Cost after allocation	$	$	$	$

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

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

   Allocation Ratios	Power	General Factory	Pottery	Retail
   Machine hours
   Square footage

   Cost Allocations	Pottery	Retail
   General Factory	$	$
   Power
   Direct costs
   Cost after allocation	$	$

Answer 1

Answer 1:

The proportion of machine-hours = 7:3

The proportion of square footage = 4:6

	Pottery	Retail	General Factory	Power
Operating costs	$   96,000	$   56,000	$          181,200	$ 140,400
General Factory	$   72,480	$ 108,720	$         (181,200)
Power	$   98,280	$   42,120		$(140,400)
Total	$ 266,760	$ 206,840	$                     -	$             -

Answer 2:

The proportion of machine-hours = 0:0:7:3

The proportion of square footage = 25:0:40:60, or 5:0:8:12

	Power	General Factory	Pottery	Retail
Operating costs	$ 140,400	$          181,200	$   96,000	$   56,000
General Factory	$    36,240	$         (181,200)	$   57,984	$   86,976
Total	$ 176,640	$                     -	$ 153,984	$ 142,976
Power	$(176,640)	$                     -	$ 123,648	$   52,992
Total	$             -	$                     -	$ 277,632	$ 195,968

Answer 3:

The proportion of machine-hours = 0:25:70:30, or 0:5:14:6

The proportion of square footage = 25:0:40:60, or 5:0:8:12

	Pottery	Retail	General Factory	Power
Total cost	$   96,000.00	$   56,000.00	$     181,200.00	$ 140,400.00
General Factory	$   69,760.00	$ 104,640.00	$   (218,000.00)	$    43,600.00
Total cost	$ 165,760.00	$ 160,640.00	$     (36,800.00)	$ 184,000.00
Power	$ 103,040.00	$   44,160.00	$       36,800.00	$(184,000.00)
Total cost	$ 268,800.00	$ 204,800.00	$                     -	$                  -

Calculations:

Let the total cost of	General Factory	be x.
Let the total cost of	Power	be y.

and,

So, x = 181200 + 0.2y	---------Equation 1
y = 140400 + 0.2x	---------Equation 2

and,

Solving Equation 1 and 2:

Substitute value of 'y' from equation 2 in Equation 1-

So, x = 181200 + 0.2 (140400 + 0.2x)

So, x = $ 218000

The total cost of General Factory is $ 218000

and,

Putting the value of x in equation 2-

So, y = 140400 + 0.2 * 218000

So, y = $ 184000

The total cost of Power is $ 184000

In case of any doubt, please feel free to comment.