Question

Support department cost allocation—reciprocal services method

Davis Snowflake & Co. produces Christmas stockings in its Cutting and Sewing departments. The Maintenance and Security departments support the production of the stockings. Costs from the Maintenance Department are allocated based on machine hours, and costs from the Security Department are allocated based on asset value. Information about each department is provided in the following table:

	Maintenance Department	Security Department	Cutting Department	Sewing Department
Machine hours	800	2,000	8,400	9,600
Asset value	$2,000	$1,470	$2,500	$5,500
Department cost	$42,480	$18,880	$64,000	$80,000

Determine the total cost of each production department after allocating all support department costs to the production departments using the reciprocal services method.

	Cutting Department		Sewing Department
Production departmentsʼ total costs	$		$

Answer 1

Compute total production department cost as follows:

Particulars	Department
	Cutting	Sewing
Direct costs	$64,000	$80,000
Maintenance department costs
$47,200 × 42%	$19,824
$47,200 × 48%		$22,656
Security department costs
$23,600 × 25%	$5,900
$23,600 × 55%		$12,980
Total production department costs	$89,724	$115,636

Notes:

Compute cost proportions as follows

Maintenance	Security	Cutting	Sewing	Total
	2,000	8,400	9,600	20,000
	10.00%	42.00%	48.00%	100.00%
$2,000		$2,500	$5,500	$10,000
20.00%		25.00%	55.00%	100.00%

Setup the following simultaneous equation and solve for service department costs

Total service Department Cost	=	Direct cost	+	Allocated Cost
Maintenance Department (MD)	=	$42,480	+	0.20 SD
Security Department (SD)	=	$18,880	+	0.10 MD

Substituting the second equation into the fist equation

MD                  = $42,480 + 0.20 × ($18,880 + 0.10 MD)

MD                  = $42,480 + $3,776 + 0.02 MD

0.98 MD           = $46,256

MD                  = $47,200

Substituting the value of MD into the second equation

            SD                   = $18,880 + (0.10 × $47,200)

            SD                   = $23,600