Question

Exercise 11-31 Cost Allocation: Reciprocal Method (LO 11-4) Caro Manufacturing has two production departments, Machining and Assembly, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of August follow: Proportion of Services Used b Direct CostsMaintenance Cafeteria Department Machining Assembly Maintenance Cafeteria Machining Assembly $99,000 64,400 40,000 32,000 0.5 0.3 0.1 0.2 0.8 Required Use the reciprocal method to allocate the service costs. (Matrix algebra is not required.) (Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.) Cost Allocation To From: Maintenance Cafeteria Machining Assembly Service department costs Maintenance Cafeteria Total

Answer 1

Solution:

Service department cost = Direct Cost + Allocated Cost

Maintenance Department Cost = $40,000 + 0.8* Cafeteria Cost

Cafeteria Department Cost = $32,000 + 0.20* Maintenance Cost

Cafeteria Cost = $32,000 + 0.20 ($40,000 + 0.80*Cafeteria Cost)

Cafeteria Cost = $32,000 + $8,000 + 0.16*Cafeteria Cost

Cafeteria Cost = $40,000 / 0.84 = $47,619

Maintenance Cost = $40,000 + 0.80*$47,619 = $78,095

From	Service Department Cost Allocation - Reciprocal Method
	Service Department		Production Departments
	Maintenance	Cafeteria	Machining	Assembly
Direct charges of department	$40,000	$32,000
Maintenance (0.2:0.5:0.3)	-$78,095	$15,619	$39,048	$23,429
Cafeteria (0.8:0.1:0.1)	$38,095	-$47,619	$4,762	$4,762
Total	$0	$0	$43,809	$28,190