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FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Custom Boat Manufacturing Company makes customised boats and uses job costing system. The company has two support departments (administration and security) and two manufacturing departments (machining and assembly). The following table shows the total overhead costs of manufacturing departments after the support departments’ cost have been allocated under three cost allocation methods.

 

Cost Allocation Method

Machining Department Cost

Assembly Department Cost

Direct Method

$ 8,650,000

$ 7,350,000

Step-down Method

$ 8,500,000

$ 7,500,000

Reciprocal Method

$ 9,000,000

$ 7,000,000

 

Management of the company has decided that it will achieve the most appropriate job costs by using individual manufacturing department overhead rates to allocate the overhead costs to the jobs. These rates are developed after support-department costs are allocated to manufacturing departments. The company uses normal costing. Machining department’s cost is allocated on the basis of machine hours and Assembly department’s cost is allocated based on labour hours. The budgeted labour hour and machine hours for the two manufacturing departments are presented below.

 

Manufacturing Departments

Machine Hours

Labour Hours

Machining Department

200,000

15,000

Assembly Department

80,000

35,000

 

Required:

 

  • Based on the following information, determine the total costs for Job MT27 if the company uses Reciprocal Method to allocate support departments’ costs to the manufacturing

 

Job no. MT27

Machining

Assembly

Direct materials

$36,000

$6,710

Direct labour cost

$1,550

$1,650

Direct labour hours

45

70

Machine Hours

210

20

 

The company evaluates the performance of the operating department managers on the basis of how well they managed their total costs, including allocated costs. As the manager of the Machining Department, which allocation method would you prefer to allocate support department’s costs to manufacturing departments?

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