Question

ForestLand Wood Products manufactures lumber and wood components. The company has two main product lines: Hardwood and Softwood. Hardwoods are used for flooring, cabinetry, paneling, doors and trimwork. Softwoods are used for wall studs, joists, planks, rafters, beams, stringers, posts, decking, subflooring and concrete forms. ForestLand also sells a by-product, wood shavings and saw dust. Shavings are purchased for farm and industrial use as well as for further processing into wood pellets and fiber board. The revenue is allocated to each product line based on the percentage of thousand board feet produced by the product line.

Your accounting firm has been retained by ForestLand for three years. You have been assigned to properly allocate support department costs. Your manager wants the allocation to be as accurate as possible and has instructed you to use the reciprocal services method. She reminds you that revenue from by-products are used to offset costs.

You begin your research and learn that there are four production departments: log yard, milling, drying, and packaging. The Hardwood line produces 300 thousand board feet of product while the Softwood produces 900 thousand board feet. The milling department direct costs, direct labor and overhead per thousand board feet for Hardwood is two times that of Softwood. You have been instructed to use the weighted average method to allocate the costs in the milling department between the two product lines. The remaining department costs are the same for both product lines, per thousand board feet.

There are two support departments: maintenance and administration. The maintenance department is responsible for maintaining all equipment and janitorial duties. Because the equipment is used more extensively for hardwoods, the department cost driver is hours worked. The administration department includes the company president and his staff. Their duties include accounting, human resources, and information technology. The cost driver for the administration department is number of employees.

In your first step, you determine the costs traced to each department and the usage of the support department cost drivers. You have created the following table:

	Maintenance	Administration	Log Yard	Milling	Drying	Packaging
Hours worked	11,000	9,720	8,100	25,920	16,200	21,060
Number of employees	6	4	4	10	12	8
Department costs	$212,960	$261,690	$375,045	$767,400	$524,095	$271,040

Your next step is to determine the proportional usage of each support department's cost driver by the other departments to which its costs are to be allocated. Complete the following tables.

Maintenance
Department		Usage Percent
			%
Log Yard
Milling
Drying
Packaging
Totals			%

Administration
Department		Usage Percent
			%
Log Yard
Milling
Drying
Packaging
Totals			%

Answer 1

	Maintenance			Admin
	Machine Hrs	% of total		Employees	% of total
Maintenance	0	0		6	15%
Admin	9720	12%		0	0%
Log yard	8100	10%		4	10%
Milling	25920	32%		10	25%
Drying	16200	20%		12	30%
Packaging	21060	26%		8	20%
	81000	100%		40	100%

Total Maintenance cost = Maintenance department cost + cost allocated to maintenance from administration.

Total Administration cost = Administration department cost + cost allocated to administration from maintenance.

	261690 + 12% of maintenance cost
	261690 + 12% of (Maintenance department cost + cost allocated to maintenance from administration)
	261690 + 12% of (212960 + 15% of admin cost)
Administration cost	261690 + 12%(212960 + 0.15A)
Administration cost	261690 + 25555.2 + 0.018A

Administration cost

292510.387

Total Administration cost

292780.4 (261690+12% of 256836.6)

Total Maintenance cost

256836.6 (212960+ 15% of 292510.387)

	Maintenance	Admin	Log yard	Milling	Drying	Packaging
Dept costs	212,960.00	261,690.00	375,045.00	767,400.00	524,095.00	271,040.00
Allocation of maintenance	(256,836.56)	30,820.39	25,683.66	82,187.70	51,367.31	66,777.51
Allocation of admin	43,917.06	(292,780.39)	29,278.04	73,195.10	87,834.12	58,556.08