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 16 people, and the Assembly Department employs 77 people. Each person in these two departments works 1,950 hours per year. The production-related overhead costs for the Molding Department are budgeted at $176,000, and the Assembly Department costs are budgeted at $92,000. Two support departments—Engineering and General Factory—directly support the two production departments and have budgeted costs of $241,000 and $361,000, 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	1,900	8,100
Square feet	117,610	—	433,300	68,090

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)

The reciprocal allocation method is preferred because it recognizes that all support departments serve one another.

Answer 1

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Part 1
		Engineering	General Factory	Molding	Assembly
Department Cost		$        241,000	$                 361,000	$    176,000	$     92,000
Allocation of:
Engineering	19/100 and 81/100	$       -241,000		$      45,790	$   195,210
Gen Factory	0.86 and 0.14		$                -361,000	$    310,460	$     50,540
Total Overhead cost		$                    -	$                             -	$    532,250	$   337,750
Direct Labor Hours				31,200	150,150
Overhead Rate per DLH				$        17.06	$          2.25
Part 2
		Engineering	General Factory	Molding	Assembly
Engineering Hours	Ratio of Engineering hours		0.18699	0.15447	0.65854
Square Feet	Ratio of Square Feet	0.19000		0.70000	0.11000
Equation:
E=	$241,000+0.19GF
GF=	$361,000+0.18699E
E=	$241,000+0.19($361,000+0.18699E)
E=	$241,000+$68,590+0.0355E		0.03553	0.96447
0.9645E=	$                                                                   309,590
E=	$                                                                   320,985
GF=	$361,000+0.18699($320,985)
GF=	$                                                                   421,021
		Engineering	General Factory	Molding	Assembly
Department Cost		$        241,000	$                 361,000	$    176,000	$     92,000
Allocation of:
Engineering	$320,985 in Engineering Hours Ratio	$       -320,985	$                    60,022	$      49,583	$   211,380
Gen Factory	$421,021 in Square feet ratio	$           79,998	$                -421,021	$    294,715	$     46,312
Total Overhead cost	R/off	$                     0	$                             -0	$    520,298	$   349,693
Direct Labor Hours				31,200	150,150
Overhead Rate per DLH				$        16.68	$          2.33
Part 3
The reciprocal allocation method is preferred because it recognizes that all support departments serve one another.