Problem 7.35 Comparison of Methods of Allocation

Duweynie Pottery, Inc., is divided into two 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. No effort is made to seperate fixed and variable costs; however, only budgeted costs are allocated. Allocations for the coming year are based on the following data:

Support Departments Operating Divisions

Power General Factory Pottery Retail

OH costs $150,000 $160,000 $98,000 $56,000

MachineHRS 2,000 1,000 6,900 3,100

Sq. Footage 2,000 1,700 4,000 6,000

Round all allocation ratios to four significant digits. Round all allocated amounts to the nearest dollar.

Required:

1. Allocate the support service costs using the direct method.

2. Allocate the support service costs using the sequential method. The support departments are ranked in order of highest cost to lowest cost.

3. Allocate the support service costs using the reciprocal method.