Question 2: Support Department Cost allocation and Job Costing

Custom Boat Manufacturing Company makes customised boats and uses job costing system. The company has two support departments (administration and security) and two manufacturing departments (machining and assembly). The following table shows the total overhead costs of manufacturing departments after the support departments' cost have been allocated under three cost allocation methods.

Cost Allocation Method Machining Department Cost Assembly Department Cost

Direct Method $ 8,650,000 $ 7,350,000

Step-down Method $ 8,500,000 $ 7,500,000

Reciprocal Method $ 9,000,000 $ 7,000,000

Management of the company has decided that it will achieve the most appropriate job costs by using individual manufacturing department overhead rates to allocate the overhead costs to the jobs. These rates are developed after support-department costs are allocated to manufacturing departments. The company uses normal costing. Machining department's cost is allocated on the basis of machine hours and Assembly department's cost is allocated based on labour hours. The budgeted labour hour and machine hours for the two manufacturing departments are presented below.

Manufacturing Departments Machine Hours Labour Hours

Machining Department 200,000 15,000

Assembly Department 80,000 35,000

Required:

(a) Based on the following information, determine the total costs for Job MT27 if the company uses Reciprocal Method to allocate support departments' costs to the manufacturing departments.

Job no. MT27 Machining Assembly

Direct materials $36,000 $6,710

Direct labour cost $1,550 $1,650

Direct labour hours 45 70

Machine Hours 210 20

(b) The company evaluates the performance of the operating department managers on the basis of how well they managed their total costs, including allocated costs. As the manager of the Machining Department, which allocation method would you prefer to allocate support department's costs to manufacturing departments?