Trans Tech Manufacturing produces machined parts for use in rebuilding automatic transmissions for garages using job-order costing. They operate in a niche position as replacements of transmissions are costly. There are two support departments and two producing departments. The budgeted costs and the normal activity levels for each department are given below.

Support

Departments

Production

Departments

Department P

Department Q

Department R

Department S

Overhead costs

$400,000

$200,000

$200,000

$50,000

Number of Employees

8

4

30

30

Maintenance Hours

200

2,000

6,000

2,000

Machine hours

9,000

1,000

Labor hours

1,000

1,000

The costs of Department P are allocated on the basis of maintenance hours and the costs of Department Q are allocated on the basis of number of employees. Departments R and S assign overhead costs on the basis of machine hours and labor hours respectively. The company is preparing a transmission for a BMW X5 that requires 15 machine hours in Department R and 20 labor hours in Department S. The prime costs per unit have been estimated to be $450. Typical industry practice is to prepare a bid of full cost plus 20% markup.

Required

1). Allocate service department costs to the producing departments using the direct method.

2). Set up the equations that should be solved if the reciprocal method to determine service department cost allocations is used.

3). Determine the bid price per unit for the job using the reciprocal method of service allocation cost is used.