Support Department Cost Allocation Using the Direct Method Factory accountants usually allocate support department costs to the producing departments using one of three methods: the direct method, the sequential (or step) method, or the algebraic (or reciprocal) method. The objective is simple - to get all factory costs into the producing departments in order to calculate overhead rates and apply them to units produced. Why can't support departments allocate overhead costs to units produced? Support departments don't make the product that the company is in business to produce and sell - only producing departments do that. The direct method involves allocating overhead cost from the support departments to the producing departments. The direct method never allocates cost from one support department to another support department. As a result, it is the easiest of the three methods. Let's use Porter Company, as an example. Porter has two producing departments - Fabricating and Assembly - and three support departments - Maintenance, Human Resources (HR) and General Factory (GF). Porter provided the following information on the five departments: Maintenance HR GF Fabricating Assembly Direct overhead cost $80,000 $120,000 3,000 $260,000 5,000 Machine hours 1,000 $93,400 12,000 10,000 $56,700 3,000 30,000 Direct labor hours 4,000 5,000 8,000 Square footage 500 2,500 10,000 12,000 18,000 Porter uses the direct method of support department cost allocation. Maintenance is allocated based on machine hours, HR on the basis of direct labor hours, and GF on the basis of square footage. The Fabricating overhead rate is based on machine hours and the Assembly overhead rate is based on direct labor hours. Fill in the following table to allocate support department costs to the producing departments. (Round all allocation ratios to four significant digits and all allocated amounts to the nearest dollar. If an amount box does not require an entry, leave it blank or enter "O".) Support Department Cost Allocation Using the Step or Sequential Method The step or sequential method requires that support departments be ranked and that the highest ranking support department be allocated first to all lower ranking support departments and the producing departments. Then the highest ranking support department is closed and the second-highest ranking support department is allocated to lower ranking support departments and the producing departments. This continues until all support department cost has been allocated to the producing departments. The sequential method takes account of support department reciprocity. Reciprocity occurs when one support department uses the services of another support department. For example, Maintenance uses HR and HR may use the services of Maintenance. The sequential method does not take full account of reciprocity because lower ranking support department costs are allocated to higher ranking support departments. Let's use Porter Company, as an example. Porter has two producing departments (Fabricating and Assembly) and three support departments (Maintenance, Human Resources (HR) and General Factory (GF)). Porter provided the following information on the five departments: Maintenance HR GF Fabricating Assembly Direct overhead cost $80,000 $120,000 $260,000 593,400 $56,700 Machine hours 1,000 3,000 5,000 5,000 8,000 12,000 10,000 3,000 30,000 Direct labor hours 4,000 Square footage 500 2,500 10,000 12,000 18,000 Porter uses the sequential method of support department cost allocation, and support departments are ranked in order of direct overhead cost (from high to low). Maintenance is allocated based on machine hours, HR on direct labor hours, and GF on the basis of square footage. The Fabricating overhead rate is based on machine hours and the Assembly overhead rate is based on direct labor hours. Calculate the allocation ratios to five significant digits and fill them into the following table (If an amount box does not require an entry, leave it blank or enter "0".): Maintenance HR GF Fabricating Assembly General Factory Human Resources Maintenance Using the allocation ratios, fill in the following table to allocate support department costs to the producing departments. (Round all allocated amounts to the nearest dollar. Leave cells blank that do not require an entry.) Maintenance HR GF Fabricating $93,400 Assembly $56,700 Direct overhead cost $80,000 $120,000 $250,000 Allocate: Maintenance Human Resources General Factory Total after allocation $ Notice that after allocation, zero dollars remain in the support departments and all overhead cost has been allocated to the producing departments. As a check on your work, add up all direct overhead costs from the first line - it equals $610,100. Then add the totals after allocation - again, it equals $610,100, Finally, calculate the overhead rates (rounded to the nearest cent) for Fabricating and Assembly Fabricating overhead rate $ per machine hour Assembly overhead rate $ per direct labor hour Suppose that the square footage for Fabricating and Assembly were equal at 12,000 each. How would that affect the allocation of the following: Maintenance: there would be no change Human Resources: there would be no change General Factory: Increase amount allocated to Fabricating and decrease amount allocated to Assembly USIP lile allUldLIUI TALIUS, MUT I LI TUIIUWIT Ladie U Ulale suPPOIL Uepal LITIGIL UUSLS L Le pruuliny upallinels. INUUN dll allUlaleu al UUNILS LU LI Ilal 'SL Uullal. Leave Lens VIATIK LIDL UU TULI Luule all ILIY. Maintenance HR GF $250,000 Fabricating $93,400 Assembly $56,700 Direct overhead cost $80,000 $120,000 Allocate: Maintenance Human Resources General Factory Total after allocation Notice that after allocation, zero dollars remain in the support departments and all overhead cost has been allocated to the producing departments. As a check on your work, add all direct overhead costs from the first line it equals $610,100. Then add the totals after allocation - again, it equals $610,100. Finally, calculate the overhead rates (rounded to the nearest cent) for Fabricating and Assembly. Fabricating overhead rate $ overhead rate $ per machine hour Assembly overhead rate $ per direct labor hour Support Department Cost Allocation Using the Algebraic or Reciprocal Method The algebraic or reciprocal method takes full account of support department reciprocity. This method requires the solution of a system of simultaneous equations to determine the total support department costs to be allocated. In practice, relatively few companies use the reciprocal method. Let's use Anders Company, as an example. Anders has two producing departments - Cutting and Sewing - and two support departments - Maintenance and General Factory (GF). Anders provided the following information on the four departments: Maintenance GF Cutting Sewing Direct overhead cost $10,000 $75,000 Machine hours 459 $270,000 2,000 3,418 $56,400 9,000 5,000 9,000 Square footage 2,500 8,500 Anders uses the algebraic method of support department cost allocation. Maintenance is allocated based on machine hours, and GF on the basis of square footage. Calculate the allocation ratios to five significant digits and fill them into the following table (Leave cells blank that do not require an entry.): Maintenance Cutting Sewing General Factory Maintenance Using the allocation ratios, solve a system of simultaneous equations for support department cost as follows. Maintenance = $100,000+ 0.15625 GF GF = $270,000+ 0.1 Maintenance Substituting Maintenance into the equation for GF and solving for GF: GF - $270,000+ 0.1 ($100,000+ 0.15625 GF) GF = $270,000+ $10,000+ 0.015625 GF 0.984375 GF = $280,000 GF = $284,444 Then, Maintenance = $100,000+ 0.15625 GF GF = $ 270,000 + 0.1 Maintenance Substituting Maintenance into the equation for GF and solving for GF: GF = $270,000+ 0.1 ($100,000+ 0.15625 GF) GF = $270,000+ $10,000+ 0.015625 GF 0.984375 GF = $280,000 GF = $284,444 Then, Maintenance = $100,000+ 0.15625 ($284,444) $144,444 Using the newly calculated amounts for GF and Maintenance and the allocation ratios, fill in the following table to allocate support department costs to the producing departments. (Round all allocated amounts to the nearest dollar. Leave cells blank that do not require an entry.) Maintenance GF Cutting Sewing Direct overhead cost $100,000 $270,000 $56,400 $75,000 Allocate: General Factory Maintenance Total after allocation Notice that after allocation, zero dollars remain in the support departments and all overhead cost has been allocated to the producing departments. As a check on your work, add all direct overhead costs from the first line - It equals $501,400. Then add the totals after allocation - again, it equals $501,400. Support Department Cost Allocation Using the Direct Method Factory accountants usually allocate support department costs to the producing departments using one of three methods: the direct method, the sequential (or step) method, or the algebraic (or reciprocal) method. The objective is simple - to get all factory costs into the producing departments in order to calculate overhead rates and apply them to units produced. Why can't support departments allocate overhead costs to units produced? Support departments don't make the product that the company is in business to produce and sell - only producing departments do that. The direct method involves allocating overhead cost from the support departments to the producing departments. The direct method never allocates cost from one support department to another support department. As a result, it is the easiest of the three methods. Let's use Porter Company, as an example. Porter has two producing departments - Fabricating and Assembly - and three support departments - Maintenance, Human Resources (HR) and General Factory (GF). Porter provided the following information on the five departments: Maintenance HR GF Fabricating Assembly Direct overhead cost $80,000 $120,000 3,000 $260,000 5,000 Machine hours 1,000 $93,400 12,000 10,000 $56,700 3,000 30,000 Direct labor hours 4,000 5,000 8,000 Square footage 500 2,500 10,000 12,000 18,000 Porter uses the direct method of support department cost allocation. Maintenance is allocated based on machine hours, HR on the basis of direct labor hours, and GF on the basis of square footage. The Fabricating overhead rate is based on machine hours and the Assembly overhead rate is based on direct labor hours. Fill in the following table to allocate support department costs to the producing departments. (Round all allocation ratios to four significant digits and all allocated amounts to the nearest dollar. If an amount box does not require an entry, leave it blank or enter "O".) Support Department Cost Allocation Using the Step or Sequential Method The step or sequential method requires that support departments be ranked and that the highest ranking support department be allocated first to all lower ranking support departments and the producing departments. Then the highest ranking support department is closed and the second-highest ranking support department is allocated to lower ranking support departments and the producing departments. This continues until all support department cost has been allocated to the producing departments. The sequential method takes account of support department reciprocity. Reciprocity occurs when one support department uses the services of another support department. For example, Maintenance uses HR and HR may use the services of Maintenance. The sequential method does not take full account of reciprocity because lower ranking support department costs are allocated to higher ranking support departments. Let's use Porter Company, as an example. Porter has two producing departments (Fabricating and Assembly) and three support departments (Maintenance, Human Resources (HR) and General Factory (GF)). Porter provided the following information on the five departments: Maintenance HR GF Fabricating Assembly Direct overhead cost $80,000 $120,000 $260,000 593,400 $56,700 Machine hours 1,000 3,000 5,000 5,000 8,000 12,000 10,000 3,000 30,000 Direct labor hours 4,000 Square footage 500 2,500 10,000 12,000 18,000 Porter uses the sequential method of support department cost allocation, and support departments are ranked in order of direct overhead cost (from high to low). Maintenance is allocated based on machine hours, HR on direct labor hours, and GF on the basis of square footage. The Fabricating overhead rate is based on machine hours and the Assembly overhead rate is based on direct labor hours. Calculate the allocation ratios to five significant digits and fill them into the following table (If an amount box does not require an entry, leave it blank or enter "0".): Maintenance HR GF Fabricating Assembly General Factory Human Resources Maintenance Using the allocation ratios, fill in the following table to allocate support department costs to the producing departments. (Round all allocated amounts to the nearest dollar. Leave cells blank that do not require an entry.) Maintenance HR GF Fabricating $93,400 Assembly $56,700 Direct overhead cost $80,000 $120,000 $250,000 Allocate: Maintenance Human Resources General Factory Total after allocation $ Notice that after allocation, zero dollars remain in the support departments and all overhead cost has been allocated to the producing departments. As a check on your work, add up all direct overhead costs from the first line - it equals $610,100. Then add the totals after allocation - again, it equals $610,100, Finally, calculate the overhead rates (rounded to the nearest cent) for Fabricating and Assembly Fabricating overhead rate $ per machine hour Assembly overhead rate $ per direct labor hour Suppose that the square footage for Fabricating and Assembly were equal at 12,000 each. How would that affect the allocation of the following: Maintenance: there would be no change Human Resources: there would be no change General Factory: Increase amount allocated to Fabricating and decrease amount allocated to Assembly USIP lile allUldLIUI TALIUS, MUT I LI TUIIUWIT Ladie U Ulale suPPOIL Uepal LITIGIL UUSLS L Le pruuliny upallinels. INUUN dll allUlaleu al UUNILS LU LI Ilal 'SL Uullal. Leave Lens VIATIK LIDL UU TULI Luule all ILIY. Maintenance HR GF $250,000 Fabricating $93,400 Assembly $56,700 Direct overhead cost $80,000 $120,000 Allocate: Maintenance Human Resources General Factory Total after allocation Notice that after allocation, zero dollars remain in the support departments and all overhead cost has been allocated to the producing departments. As a check on your work, add all direct overhead costs from the first line it equals $610,100. Then add the totals after allocation - again, it equals $610,100. Finally, calculate the overhead rates (rounded to the nearest cent) for Fabricating and Assembly. Fabricating overhead rate $ overhead rate $ per machine hour Assembly overhead rate $ per direct labor hour Support Department Cost Allocation Using the Algebraic or Reciprocal Method The algebraic or reciprocal method takes full account of support department reciprocity. This method requires the solution of a system of simultaneous equations to determine the total support department costs to be allocated. In practice, relatively few companies use the reciprocal method. Let's use Anders Company, as an example. Anders has two producing departments - Cutting and Sewing - and two support departments - Maintenance and General Factory (GF). Anders provided the following information on the four departments: Maintenance GF Cutting Sewing Direct overhead cost $10,000 $75,000 Machine hours 459 $270,000 2,000 3,418 $56,400 9,000 5,000 9,000 Square footage 2,500 8,500 Anders uses the algebraic method of support department cost allocation. Maintenance is allocated based on machine hours, and GF on the basis of square footage. Calculate the allocation ratios to five significant digits and fill them into the following table (Leave cells blank that do not require an entry.): Maintenance Cutting Sewing General Factory Maintenance Using the allocation ratios, solve a system of simultaneous equations for support department cost as follows. Maintenance = $100,000+ 0.15625 GF GF = $270,000+ 0.1 Maintenance Substituting Maintenance into the equation for GF and solving for GF: GF - $270,000+ 0.1 ($100,000+ 0.15625 GF) GF = $270,000+ $10,000+ 0.015625 GF 0.984375 GF = $280,000 GF = $284,444 Then, Maintenance = $100,000+ 0.15625 GF GF = $ 270,000 + 0.1 Maintenance Substituting Maintenance into the equation for GF and solving for GF: GF = $270,000+ 0.1 ($100,000+ 0.15625 GF) GF = $270,000+ $10,000+ 0.015625 GF 0.984375 GF = $280,000 GF = $284,444 Then, Maintenance = $100,000+ 0.15625 ($284,444) $144,444 Using the newly calculated amounts for GF and Maintenance and the allocation ratios, fill in the following table to allocate support department costs to the producing departments. (Round all allocated amounts to the nearest dollar. Leave cells blank that do not require an entry.) Maintenance GF Cutting Sewing Direct overhead cost $100,000 $270,000 $56,400 $75,000 Allocate: General Factory Maintenance Total after allocation Notice that after allocation, zero dollars remain in the support departments and all overhead cost has been allocated to the producing departments. As a check on your work, add all direct overhead costs from the first line - It equals $501,400. Then add the totals after allocation - again, it equals $501,400