Question

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 23 people, and the Assembly Department employs 78 people. Each person in these two departments works 2,020 hours per year. The production-related overhead costs for the Molding Department are budgeted at $177,000, and the Assembly Department costs are budgeted at $86,000. Two support departments—Engineering and General Factory—directly support the two production departments and have budgeted costs of $236,000 and $354,000, 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	—	2,300	2,400	7,600
Square feet	102,720	—	417,300	121,980

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	$

3. Explain the difference between the methods, and indicate the arguments generally presented to support the reciprocal method over the direct allocation method. (CMA adapted)

Answer 1

1	Direct Allocation
	Particulars	Moulding	Assembly
	No of Employees	23	78
	Hours per annum per employee	2,020	2,020
	Budgeted Production Overhead Cost ($)	177,000	86,000
	Engineering Overhead
	Allocation of $ 236,000	56,640	179,360
	General factory overhead
	Allocation of $ 354,000	273,929	80,071
	Total Cost	507,569	345,431
	Total No of direct labour hours	46,460	157,560
	Over head cost per direct labour hour	10.92	2.19
2	Reciprocal Allocation
	Particulars	Moulding	Assembly
	No of Employees	23	78
	Hours per annum per employee	2,020	2,020
	Budgeted Production Overhead Cost ($)	177,000	86,000
	Engineering Overhead
	a.) Allocation of 56,640 pertaining to General factory Overhead	13,594	43,046
	b.) Allocation of $ 236,000	46,049	145,821
	General factory overhead
	a.) Allocation of $ 44,130 pertaining to Engineering Overhead	34,148	9,982
	b.) Allocation of $ 354,000	230,100	67,260
	Total Cost	500,891	352,109
	Total No of direct labour hours	46,460	157,560
	Over head cost per direct labour hour	10.78	2.23
	Workings
	Costs	Engineering	General factory
	Own cost	236,000	354,000
	Gen Factory	56,640	-
	Engineering	-	44,130

3. Direct method ignores the fact that support department help each other department whereas the Reciprocal Method takes into consideration that the support department provides services to other departments as well. Hence Reciprocal department provides better allocation of costs.