Question

Reciprocal Method

Eilers Company has two producing departments and two support departments. The following budgeted data pertain to these four departments:

	Support Departments		Producing Departments
	General Factory	Receiving	Assembly	Finishing
Direct overhead	$400,000	$150,000	$42,000	$71,000
Square footage	—	2,700	5,400	5,400
Number of receiving orders	300	—	1,680	1,020
Direct labor hours	—	—	25,000	40,000

Required:

1. Allocate the overhead costs of the support departments to the producing departments using the reciprocal method. (Round allocation ratios to two decimal places. Round allocated costs to the nearest dollar. If an amount is zero, enter "0".)

Allocation ratios:

	General Factory	Receiving	Assembly	Finishing
Square footage
Number of receiving orders

Allocations:

	General Factory	Receiving	Assembly	Finishing
Direct overhead cost	$	$	$	$
General Factory
Receiving
Total	$	$	$	$

2. Using direct labor hours, compute departmental overhead rates. (Round to the nearest cent.)

	Overhead Rate
Assembly	$ per direct labor hour
Finishing	$ per direct labor hour

Answer 1

1.

Allocation ratios:

	General Factory	Receiving	Assembly	Finishing
Square footage		20% [2700/13500]	40% [5400/13500]	40% [5400/13500]
Number of receiving order	10% [300/3000]		56% [1680/3000]	34% [1020/3000]

Allocation:

	Service department	Production department	Total
	General Factory	Receiving	Assembly	Finishing
Direct operating costs	$400000	$150000	$42000	$71000	$663000
Allocation:
Department P costs [20%, 40% and 40%]	-$423469	$84694	$169388	$169388	$0
Department Q costs [10%, 56% and 34%]	$23469	-$234693.88	$131429	$79796	$0
Total	$0	$0	$342817	$320184	$663000

Let the total cost of general factory be P and receiving department be Q

P = 400000+0.1Q      (1)

Q = 150000+0.2P        (2)

Substitute value of P in equation 2

Q = 150000+0.2(400000+0.1Q)

Q = 150000+80000+0.02Q

Q = 230000+0.02Q

Q -0.02Q = 230000

0.98Q = 230000

Q = 230000/0.98

Q = 234693.88

Substitute value of Q in equation 1

P = 400000+0.1Q

P = 400000+0.1(234693.88)

P = 400000+23469.388

P = 423469.388

2.

Assembly	$13.71 per direct labor hour
Finishing	$8 per direct labor hour

Solution:

Departmental overhead rates = Total overhead/direct labor hours

Departmental overhead rates for Assembly = $342817/25000

Departmental overhead rates for Assembly = $13.71

Departmental overhead rates for Finishing = $320184/40000

Departmental overhead rates for Finishing = $8