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	$140,400		$171,600		$97,000		$55,000
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

Direct Method
Allocation Ratios	Pottery	Retail
Proportion of Machine Hour	0.7	0.3
	(7/10)	(3/10)
Proportion of Square Footage	0.4	0.6
	(4/10)	(6/10)
Cost Allocation	Pottery	Retail
Direct Cost	$97,000	$55,000
General factory	$120,120	$51,480
( 171600*70% & 30%)
Power	$56,160	$84,240
(140400*40% & 60%)
Cost after allocation	$273,280	$190,720

2. Sequential Method
Allocation Ratios	Power	General Factory	Pottery	Retail
Machine hours	0	0	0.7	0.3
	0	0	7000/10000	30000/10000
Square Footage	0.2	0	0.32	0.48
	(2500/12500)	0	(4000/12500)	(6000/12500)
Cost Allocation	Power	General Factory	Pottery	Retail
Cost	$140,400	$171,600	$97,000	$55,000
General factory (02.:0.32:0.48)	$34,320	-$171,600	$54,912	$82,368
	$174,720		$151,912	$137,368
Power (0.7:0.3)	-$174,720	$0	$122,304	$52,416
Cost after Allocation		$0	$274,216	$189,784

3. Reciprocal Method
Allocation Ratios	Power	General Factory	Pottery	Retail
Machine hours	0	0.2	0.56	0.24
	0	(2500/12500)	(7000/12500)	(3000/12500)
Square Footage	0.2	0	0.32	0.48
	2500/12500	0	4000/12500	6000/12500

Let Assume that Power Cost is X and General Factory Cost is Y

X = 140400 + 0.20*Y ( Equation-1)

Y = 171600 + 0.20*X ( Equation-2)

Putting equation 1 in 2

Y = 171600 + 0.20*(140400 + 0.20*Y)

Y= 199680+0.04 Y

0.96 Y= 199680

Y=208000

Put value of Y in Equation 1

X= 140400+ 0.20X208000=$182000

Hence, Cost of General Factory will be $208000, Power: - $182000

Let Assume that Power Cost is X and General Factory Cost is Y

X = 140400 + 0.20*Y ( Equation-1)

Y = 171600 + 0.20*X ( Equation-2)

Putting equation 1 in 2

Y = 171600 + 0.20*(140400 + 0.20*Y)

Y= 199680+0.04 Y

0.96 Y= 199680

Y=208000

Put value of Y in Equation 1

X= 140400+ 0.20X208000=$182000

Hence, Cost of General Factory will be $208000, Power: - $182000