Question

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Midland Resources has two production departments (Fabrication and Assembly) and three service departments (Engineering, Administration, and...

Midland Resources has two production departments (Fabrication and Assembly) and three service departments (Engineering, Administration, and Maintenance). During July, the following costs and service department usage ratios were recorded.

Supplying Department Using Department
Engineering Administration Maintenance Fabrication Assembly
Engineering 0 50 % 0 10 % 40 %
Administration 10 % 0 20 % 50 % 20 %
Maintenance 0 50 % 0 20 % 30 %
Direct cost $ 24,000 $ 179,500 $ 25,000 $ 185,000 $ 50,000

  
Required:

Allocate the service department costs to the two operating departments using the reciprocal method. (Do not round intermediate calculations.)

Costs Fabrication Assembly
Engineering ? ? ?
Administration ? ? ?
Maintenance ? ? ?
Total

Solutions

Expert Solution

SOLUTION

Equation:Enginnering (X) ,Administration (y ) and maintenance(z)

Enginnering dept. total cost ((x) = 24000 + .10 y             [Equation 1]

Administration dept. cost (y): 179500+ .50x +.50z            [Equation 2]

Maintenance dept. cost (z): 25000+ .20y                      [Equation 3]

Putting value of equation 1 & equation 3 in equation 2

y= 179500+ .50 (24000+.10y)+.50(25000+.20y)

y= 179500+12000+.05 y+12500+.1y

y-.05y-.1y= 204000

y= 204000/.85 = 240,000

x= 24000+ (.10*240000) = 48,000

z=25000+.20 (240000)=25000+48000=73,000

Cost Fabrication Assembly
Engineering 48,000 4800 [48,000*.10] 19,200 [48000*.40]
Administration 240,000 120,000 [240000*.50] 48,000 [240000*.20]
Maintenance 73,000 14,600   [73000*.20] 21,900 [73000*.30]
Total 139,400 89,100

ekkarill92 answered 1 year ago
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