Question

Part 1 Pottery Inc., is divided into 2 operating divisions: Pottery and Retail. The company allocates Power and General Factory department costs to each operating division. Power costs are allocated on the basis of the number of machine hours and general factory costs on the basis of square footage. Allocation for the coming year are based on the following data? Operating Divisions Support Departments Power Department General factory Department $150,000 $160,000 Pottery $98.000 Retail $56,000 Direct costs Normal Activity: Machine Hours Square Footage N 1000 . 2000 6,900 4000 3,100 6,000 Please make sure you review Cornerstone 7.3 and 7.4 before attempting this part of the project. For all requirements, round allocation ratios to four significant digits and round allocated costs to the nearest dollar. Required: Complete 1-5 below and all computations below must use cell references. 1. Calculate the allocation ratios for the departments using the direct method in the table provided below. Power Department General factory Department Pottery Retail Power Department General factory Department 2. Using the direct method, allocate the costs of the Power Department and General Factory Department to the Pottery and Retail departments in the table provided below. Power Department $150,000 General factory Department $160,000 Pottery $98,000 Retail $56,000 Direct costs Allocate: Power Department General factory Department Total After Allocation 3. Determine the support department to allocate first, by ranking the support departments in order of the percentage of service provided to the other support department.

*Cornerstone7.3, 7.4 is similar problems to this problem, but we don't need any information from that questions in order to solve this problem.

Answer 1

1. Distribute the cost directly on the basis given in question like cost of power department will be allocated in the ratio of machine hours between pottery department and retail department. After that the cost of general factory department will be shared in the pottery and retail department on the basis of square footage.

	Power Department	General Factory Department	Pottery	Retail
Power Department			69	31
General Factory Department			2	3

2. Allocate the costs of power department and general factory department in the above ratios.

	Power Department	General Factory Department	Pottery Department	Retail Department
Direct Costs	$150,000	$160,000	$98,000	$56,000
Allocate:
Power Department	-$150,000		$103,500	$46,500
General Factory Department		-$160,000	$64,000	$96,000
Total Cost after allocation	NIL	NIL	$265,500	$198,500

3.The support department which has incurred greatest cost will be allocated first. SO in this case the cost of general factory department will be allocated first and after that the cost of power department will be allocated.

4. The cost of General factory department will be distributed in the ratio of 1:2:3 in power department, pottery department and retail department.

After that Power department cost will be distributed in the ratio of 10:69:31 in general factory department, pottery department and retail department.

	power department	general factory department	Pottery Department	Retail Department
General Factory Department	1		2	3
Power Department		10	69	31

5. Using the above ratios:

First we will allocate the General factory department cost to power department, pottery and retail on the basis of square footage.

After that the total cost of power department will be allocated in general factory department, pottery and retail.

this process will continued till the time the cost in both the support departments get zero.

	Power Department	General Factory Department	Pottery	Retail
Direct Costs	$150,000	$160,000	$98,000	$56,000
Allocation of general factory department cost	$26,666.67	-$160,000	$53,333.33	$80,000
total cost	$176,666.67	0	$151,333.33	$136,000
Allocation of power department cost	-$176,666.67	$16,060.61	$$110,818.18	$49,787.88
Total cost	0	$16,060.61	$262,151.51	$185,787.88
Allocation of factory department cost	$2,676.77	-$16,060.61	$5,353.54	$8,030.30
total cost	$2,676.77	0	$267,505.05	$193,818.18
Allocation of power department cost	-$2,676.77	$243.34	$1,679.06	$754.36
Total cost	0	$243.34	$269,184.11	$194,572.54
Allocation of factory department cost	$40.56	-$243.34	$81.11	$121.67
Total cost	$40.56	0	$269,265.22	$194,694.21
Allocation of Power department cost	-$40.56	$3.69	$25.44	$11.43
Total cost	0	$3.69	$269.290.66	$194,705.64
Allocation of factory department cost	0	-$3.69	$1.48	$2.21
Total Cost	0	0	$269,292.14	$194,707.85