Question

Problem 7.36 (Algorithmic) Direct Method, Reciprocal Method, Overhead Rates Macalister Corporation is developing departmental overhead rates based on direct labor hours for its two production departments—Molding and Assembly. The Molding Department employs 16 people, and the Assembly Department employs 77 people. Each person in these two departments works 2,100 hours per year. The production-related overhead costs for the Molding Department are budgeted at $152,000, and the Assembly Department costs are budgeted at $80,000. Two support departments—Engineering and General Factory—directly support the two production departments and have budgeted costs of $202,000 and $363,000, respectively. The production departments’ overhead rates cannot be determined until the support departments’ costs are properly allocated. The following schedule reflects the use of the Engineering Department’s and General Factory Department’s output by the various departments. Engineering General Factory Molding Assembly Engineering hours - 2,200 2,500 7,500 Square feet 147,660 - 423,720 70,620 For all requirements, round allocation ratios to four significant digits and round allocated costs to the nearest dollar.

Required: 1. Calculate the overhead rates per direct labor hour for the Molding Department and the Assembly Department using the direct allocation method to charge the production departments for support department costs. Round final answers to the nearest cent. Overhead rate per DLH Molding $ Assembly $

2. Calculate the overhead rates per direct labor hour for the Molding Department and the Assembly Department using the reciprocal method to charge support department costs to each other and to the production departments. Round final answers to the nearest cent. Round your intermediate calculations to four decimal places. Overhead rate per DLH Molding $ Assembly $

Answer 1

Solution 1:

From	Service Department Cost Allocation and computation of overhead rate per direct labor hour - Direct Method
	Support Department		Production Department
	Engineering	General Factory	Molding	Assembly
Direct charges of department	$202,000	$363,000	$152,000	$80,000
Engineering (2500:7500)	-$202,000		$50,500	$151,500
General Factory (423720 : 70620)		-$363,000	$311,143	$51,857
Total	$0	$0	$513,643	$283,357
Direct labor hours			33600	161700
Overhead rates per direct labor hour			$15.29	$1.75

Solution 2:

Service department cost = Direct Cost + Allocated Cost

Engineering Department Cost = $202,000 + 147660 / 642000 * General factory Cost

Engineering Department Cost = $202,000 + 0.23 * General factory Cost

Generaly factory cost = $363000 + 2200/12200 * Engineering cost

General factory cost = $363,000 + 0.1803 * ($202,000 + 0.23 * General factory cost)

General factory cost = $363,000 + $36,426 + 0.0415 * general factory cost

General factory cost = $416,709

Enginereing Department Cost = $202,000 + 0.23*$416,709 = $297,843

From	Service Department Cost Allocation and computation of overhead rate per direct labor hour - Reciprocal
	Support Department		Production Department
	Engineering	General Factory	Molding	Assembly
Direct charges of department	$202,000	$363,000	$152,000	$80,000
Engineering (2200:2500:7500)	-$297,843	$53,709	$61,033	$183,100
General Factory (147660:423720 : 70620)	$95,843	-$416,709	$275,028	$45,838
Total	$0	$0	$488,061	$308,938
Direct labor hours			33600	161700
Overhead rates per direct labor hour			$14.53	$1.91