Question

Barstow Manufacturing Company has two service departments — product design and engineering support, and two production departments — assembly and finishing. The distribution of each service department's efforts to the other departments is shown below:

FROM	TO
	Design			Support			Assembly			Finishing
Design	0	%		10	%		30	%		60	%
Support	20	%		0	%		45	%		35	%

The direct operating costs of the departments (including both variable and fixed costs) were as follows:

Design	$	140,000
Engineering Support	$	160,000
Assembly	$	550,000
Finishing	$	840,000

The total cost accumulated in the assembly department using the reciprocal method is (calculate all ratios and percentages to 4 decimal places, for example 33.3333%, and round all dollar amounts to the nearest whole dollar):

Multiple Choice

• $1,062,857.

• $1,890,000.

• $1,007,449.

• $682,551.

• $627,143.

Answer 1

Solution:

Service department cost = Direct Cost + Allocated Cost

Design Department Cost = $140,000 + 0.20 of Support cost

Support Department Cost = $160,000 + 0.10 of design cost

Support Cost = $160,000 + 0.10 ($140,000 + 0.20*Support Cost)

Support Cost = $160,000 + $14,000 + 0.02*Support Cost

Support Cost = $174,000 / 0.98 = $177,551

Design Cost = $140,000 + 0.20*$177,551 = $175,510

From	Service Department Cost Allocation - Reciprocal Method
	Service Department		Production Departments
	Design	Support	Assembly	Finishing
Direct charges of department	$140,000	$160,000	$550,000	$840,000
Design (10:30:60)	-$175,510	$17,551	$52,653	$105,306
Support (20:45:35)	$35,510	-$177,551	$79,898	$62,143
Total	$0	$0	$682,551	$1,007,449

Hence 4th option is correct.