Problem 6. Highland Producers prices its products at full cost plus 30 percent. The company operates twosupport departments and two producing departments. Budgeted costs and normal activity levels are asfollows:Support DepartmentsProducing DepartmentsАBC$240,0006,000406,40010,800Support Department A's costs are allocated based on square feet, and Support Department B's costs areallocated based on number of employees. Department C uses direct labor hours to assign overhead costsOverhead costs$40,0001,000$100,0001,200$180,0002,000Square feetNumber of employees20306010,0006,000Direct labor hoursMachine hoursto products, while Department D uses machine hours.Required:Determine the amount of costs for each producing department using the direct method ofallocationа.b. Determine the amount of costs for each producing department using the sequential method ofallocation Department B should be allocated first.Determine the amount of costs for each producing department using the reciprocal method ofallocationс.

The reciprocal technique allocates expenditures incurred by service departments to other departments using simultaneous equations; allocations are also made between service departments. This strategy produces a precise cost distribution.1. Direct Method Department Allocation % = (Production Department Quantity ÷ Total Qantity for all production department) * Department cost Therefore, A to C:= 2000 /(2,000+6,000) = .25 × $40,000 = $10,000 A to D:= 600 /(2,000+6,000) = .75 × $40,000 = $30,000 B to C:= 60 /(60+40) = .6 × $100,000 = $60,0002. Service Departments Production departments Total Costs A B C D Dept. costs before allocation $ 40,000 $ 1,00,000 $ 1,80,000 $ 2,40,000 $ 5,60,000 First Step $ 16,667 $-100,000 $50,000 $ 33,333 Subtotal $ 56,667 $ - $ 2,30,000 $ 2,73,333 Second step $-56,667 $ - $14,167 $ 42,500 Total $ - $ - $ 2,44,167 $ 3,15,833 $ 5,60,000C. Reciprocal method: Step 1: Set up a system of equations for each of the service departments. A = 40,000 + [20 ÷ (20+60+40)] × B B = 100,000 + [1200 ÷ (1200+2000+6000)] × A A = 40,000 + . 0.1666667 B B = 100,000 + . 0.13043478 A A = 40,000 + 0.166667 (100,000 + . 13043478 A) A = 40,000 + 16666.667 + 0.0217391304 A 1A- 0.0217391304 A= 40,000 +16666.667 0.9782608 A = 56666.67 A = 57,925.93 B = $100,000 + 0.13043478 A × $57,925.93= 1,07,555.56 Service Departments Production departments Total Costs A B C D Dept. costs before allocation $ 40,000 $ 1,00,000 $ 1,80,000 $ 2,40,000 $ 5,60,000 Allocation : First Step $ -57,926 $7,556 $12,593 $ 33,778 Second step $-17,926 $ -1,07,556 $53,778 $35,852 Total $ -0 $ -0 $ 2,46,370 $ 3,13,630 $ 5,60,000

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Concept explainers

Manufacturing Costs

Manufacturing cost is the total cost of procuring or producing a product. In other words, the manufacturing cost is the cost that an individual or business owner undertakes for the manufacturing of goods.

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Problem 6. Highland Producers prices its products at full cost plus 30 percent. The company operates two
support departments and two producing departments. Budgeted costs and normal activity levels are as
follows:
Support Departments
Producing Departments
А
B
C
$240,000
6,000
40
6,400
10,800
Support Department A's costs are allocated based on square feet, and Support Department B's costs are
allocated based on number of employees. Department C uses direct labor hours to assign overhead costs
Overhead costs
$40,000
1,000
$100,000
1,200
$180,000
2,000
Square feet
Number of employees
20
30
60
10,000
6,000
Direct labor hours
Machine hours
to products, while Department D uses machine hours.
Required:
Determine the amount of costs for each producing department using the direct method of
allocation
а.
b. Determine the amount of costs for each producing department using the sequential method of
allocation Department B should be allocated first.
Determine the amount of costs for each producing department using the reciprocal method of
allocation
с.

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