Question

Direct, sequential, and reciprocal allocation

Ming Company has two service departments (S1 and S2) and two production departments (P1 and P2). Last year, directly identified overhead costs were $300,000 for S1 and $300,000 for S2. Information on the consumption of their services was as follows:

User Departments

Supplying Departments S1 S2 P1 P2

S1 0% 40% 30% 30%

S2 25% 0% 25% 50%

Required:

a) Determine the service department costs allocated to the two production departments using the direct method.

b) Determine the service department costs allocated to the production departments using the sequential method beginning with the allocation of S1 department costs.

c) Determine the service department costs allocated to the production departments using the reciprocal method.

Please show all steps!

Answer 1

Solution a:

From	Service Department Cost Allocation - Direct Method
	Service Department		Production Departments
	S1	S2	P1	P2
Direct charges of department	$300,000.00	$300,000.00
S1 (1:1)	-$300,000.00		$150,000.00	$150,000.00
S2 (1:2)		-$300,000.00	$100,000.00	$200,000.00
Total	$0.00	$0.00	$250,000.00	$350,000.00

Solution b:

From	Service Department Cost Allocation - Step Method (Allocation of S1 first)
	Service Department		Production Departments
	S1	S2	P1	P2
Direct charges of department	$300,000.00	$300,000.00
S1 (4:3:3)	-$300,000.00	$120,000.00	$90,000.00	$90,000.00
S2 (1:2)		-$420,000.00	$140,000.00	$280,000.00
Total	$0.00	$0.00	$230,000.00	$370,000.00

Solution c:

Service department cost = Direct Cost + Allocated Cost

S1 Cost = $300,000 + 0.25 S2 Cost

S2 cost = $300,000 + 0.40 S1 cost

S2 cost= $300,000 + 0.40 * ($300,000 + 0.25 S2 cost)

S2 cost =$300,000 + $120,000 + 0.1 S2 cost

S2 cost = $420,000 / 0.90 = $466,667

S1 cost = $300,000 + 0.25 * $466,667 = $416,667

From	Service Department Cost Allocation - Reciprocal Method
	Service Department		Production Departments
	S1	S2	P1	P2
Direct charges of department	$300,000	$300,000
S1 (4:3:3)	-$416,667	$166,667	$125,000	$125,000
S2 (1:1:2)	$116,667	-$466,667	$116,667	$233,334
Total	$0	$0	$241,667	$358,334