Question

Betty DeRose, Inc. operates two production departments, molding and
assembly, and two service departments, repair and power. Service
department costs are allocated to production departments using a
reciprocal two-stage allocation method. Repair department costs are
allocated on the basis of repair hours and power department costs
are allocated on the basis of kilowatt hours. In the second stage,
departmental overhead rates for the two production departments are
calculated using direct labor hours as the activity for each
department. Information for the four departments is given below:

                            Repair     Power     Molding     Assembly
Directly trace overhead    $83,200   $160,000   $245,600    $320,000  
Repair hours                60,000      8,000     10,000      22,000
Kilowatt hours             160,000    600,000    180,000      60,000
Direct labor hours            N/A        N/A      80,000     140,000

The company is preparing to bid on a job, job #45, which requires 40
direct labor hours in the molding department and 25 direct labor hours
in the assembly department. The direct material and direct labor cost
for job #45 is expected to total $311.

Calculate the total expected cost of job #45.

Answer 1

Solution:

Service department cost = Direct Cost + Allocated Cost

Repair Department Cost = $83,200 + [160000 / (160000+180000+60000)]* Power Cost

                                                    = $83,200 + 0.40*Power Cost

Power Department Cost = $160,000 + [8000 / (8000+10000+22000)]* Repair cost

                                             = $160,000 + 0.20 * repair Cost

Power Cost = $160,000 + 0.20 ($83,200 + 0.40*Power Cost)

Power Cost = $160,000 + $16,640 + 0.08*Power Cost

Power Cost = $176,640 / 0.92 = $192,000

Repair Cost = $83,200 + 0.40*$192,000 = $160,000

From	Service Department Cost Allocation - Reciprocal Method
	Service Department		Production Departments
	Repair	Power	Molding	Assembly
Direct charges of department	$83,200	$160,000	$245,600	$320,000
Repair (8:10:22)	-$160,000	$32,000	$40,000	$88,000
Power (16:18:6)	$76,800	-$192,000	$86,400	$28,800
Total	$0	$0	$372,000	$436,800

Computation of departmental overhead rate
Particulars	Molding	Assembly
Allocated overhead	$372,000.00	$436,800.00
Estimated direct labor hours	80000	140000
Overhead rate per direct labor hour	$4.65	$3.12

Computation of expected cost of job 45
Particulars	Amount
Direct material and labor	$311.00
Overhead - Molding (40*$4.65)	$186.00
Overhead - Assembly (25*$3.12)	$78.00
Total job cost	$575.00