Question

Background information for all problems:

Chekley Manufacturing has two production departments (Machining and Assembly). They have two service departments that provide services to each other and to production (Plant Maintenance and IT) Chekley believes Plant Maintenance (PM) should be allocated based on square footage and IT should be allocated based on computer hours. Chekley allocates Plant Maintenance first when allocating using the step method. You have the following additional information:

Total manufacturing costs

COSTS Plant maintenance $500,000

Information systems $450,000

Machining $2,000,000

Assembly $3,150,000 $6,100,000

Square Feet Computer hours

Plant maintenance 4,000.00 8,000.00

Information systems 2,000.00 4,000.00

Machining 12,000.00 24,000.00

Assembly 6,000.00 8,000.00

24,000.00 44,000.00

Problem A

1. Under the direct method, what percentage of PM should be allocated to Machining? 2. Under the direct method, what percentage of PM should be allocated to Assembly? 3. Under the direct method, how much of the total allocable cost attributable to PM should be allocated to Machining? 4. Under the direct method, how much of the total allocable cost attributable to PM should be allocated to Assembly? 5. Under the direct method, what percentage of IT should be allocated to Machining? 6. Under the direct method, what percentage of IT should be allocated to Assembly? 7. Under the direct method, how much of the total allocable cost attributable to IT should be allocated to Machining? 8. Under the direct method, how much of the total allocable cost attributable to IT should be allocated to Assembly? Problem B 1. Under the step method, what percentage of PM should be allocated to IT? 2. Under the step method, what percentage of PM should be allocated to Machining? 3. Under the step method, what percentage of PM should be allocated to Assembly? 4. Under the step method, how much of the total allocable cost attributable to PM should be allocated to IT? 5. Under the step method, how much of the total allocable cost attributable to PM should be allocated to Machining? 6. Under the step method, how much of the total allocable cost attributable to PM should be allocated to Assembly? 7. Under the step method, what percentage of IT should be allocated to PM? 8. Under the step method, what percentage of IT should be allocated to Machining? 9. Under the step method, what percentage of IT should be allocated to Assembly? 10. Under the step method, how much of the total allocable cost attributable to IT should be allocated to PM? 11. Under the step method, how much of the total allocable cost attributable to IT should be allocated to Machining? 12. Under the step method, how much of the total MOH cost attributable to IT should be allocated to Assembly?

Problem C

1. Using the reciprocal method, what is the formula for determining the total PM costs that should be allocated? PM = 500,000 + .2IT PM = 500,000 + .2(450,000) PM = 450,000 + .1IT PM = 500,000 + .1(450,000) 2. Using the reciprocal method, what is the formula for determining the total IT costs that should be allocated? IT =500,000 + .1PM IT = 450,000 + .1PM IT = 450,000 + .2(500,000) IT = 500,000 + .1(450,000) 3. Using the reciprocal method, how much in total will be allocated from PM to the other departments? 4. Using the reciprocal method, how much in total will be allocated from IT to the other departments?

Answer 1

PROBLEM A
1 to 4	Allocation of Plant Maintenance Cost: Direct Method
		Square Feet	%	Amount
	Machining	12,000	67%	3,33,333
	Assembly	6,000	33%	1,66,667
	Total	18,000	100%	5,00,000
	Rate per Sq. Ft. = 500000 / 18000 = $ 27.78 per sq. ft.
5 to 8	Allocation of Information Systems Cost: Direct Method
		Computer Hours	%	Amount
	Machining	24,000	75%	3,37,500
	Assembly	8,000	25%	1,12,500
	Total	32,000	100%	4,50,000
	Rate per Hour = 450000 / 32000 = $ 14.06 per Hour
PROBLEM B
1 to 6	Basic Allocation of Plant Maintenance Cost: Step Method
		Square Feet	%	Amount
	IS	2,000	10%	50,000
	Machining	12,000	60%	3,00,000
	Assembly	6,000	30%	1,50,000
	Total	20,000	100%	5,00,000
	Rate per Sq. Ft. = 500000 / 20000 = $ 25 per sq. ft.
7 to 11	Basic Allocation of Plant Maintenance Cost: Step Method
	Total IS Cost = Basic Cost + Allocation of PM Cost = 450000 + 50000 = 500000
		Computer Hours	%	Amount
	Machining	24,000	75%	3,75,000
	Assembly	8,000	25%	1,25,000
	Total	32,000	100%	5,00,000
	Rate per Hour = 500000 / 32000 = $ 15.625 per Hour
PROBLEM C
1 & 2	Basic Allocation of Plant Maintenance Cost: Reciprocal Method
		Square Feet	%	Amount
	IS	2,000	10%	50,000
	Machining	12,000	60%	3,00,000
	Assembly	6,000	30%	1,50,000
	Total	20,000	100%	5,00,000
	Rate per Sq. Ft. = 500000 / 20000 = $ 25 per sq. ft.
	Basic Allocation of Plant Maintenance Cost: Reciprocal Method
	Total IS Cost = Basic Cost + Allocation of PM Cost = 450000 + 50000 = 500000
		Computer Hours	%	Amount
	PM	8,000	20%	1,00,000
	Machining	24,000	60%	3,00,000
	Assembly	8,000	20%	1,00,000
	Total	40,000	100%	5,00,000
	Rate per Hour = 500000 / 40000 = $ 12.5 per Hour
	Re-allocation of PM Cost of 100000:
		Square Feet	%	Amount
	IS	2,000	10%	10,000
	Machining	12,000	60%	60,000
	Assembly	6,000	30%	30,000
	Total	20,000	100%	1,00,000
	Rate per Sq. Ft. = 100000 / 20000 = $ 5 per sq. ft.
	Re-allocation of IS Cost of 10000:
		Computer Hours	%	Amount
	PM	8,000	20%	2,000
	Machining	24,000	60%	6,000
	Assembly	8,000	20%	2,000
	Total	40,000	100%	10,000
	Rate per Hour = 10000 / 40000 = $ 0.25 per Hour
	Re-allocation of PM Cost of 2000:
		Square Feet	%	Amount
	IS	2,000	10%	200
	Machining	12,000	60%	1,200
	Assembly	6,000	30%	600
	Total	20,000	100%	2,000
	Rate per Sq. Ft. = 2000 / 20000 = $ 0.1 per sq. ft.
	Re-allocation of IS Cost of 200:
		Computer Hours	%	Amount
	Machining	24,000	75%	150
	Assembly	8,000	25%	50
	Total	32,000	100%	200
	Rate per Hour = 200 / 32000 = $ 0.00625 per Hour