Use the reciprocal services method to allocate support department cost
Phantom Ltd manufactures two products, Basic and Royal. It has two production departments, machining and finishing, and two support departments, quality control and material handling. Departmental overhead rates are applied based on machine hours for the machining department and direct labour hours for the finishing department. The budgeted level of machine hours is 40,000 hours and the budgeted level of direct labour hours is 76,000 hours. The budgeted overhead costs are as follows:
| Quality Control | Material Handling | Machining | Finishing |
| 175,000 | 190,000 | 400,000 | 480,000 |
The work done by support departments for other departments are as follows:
| Quality Control | Material Handling | Machining | Finishing | |
| Quality Control | 10% | 35% | 55% | |
| Material Handling | 5% | 60% | 35% |
Basic requires direct material costing $10 per unit and direct labour costing $35 per unit. A unit of Basic is produced using 3 machine hours in the machining department and 6 labour hours in the finishing department. Royal requires direct material costing $24 per unit and direct labour costing $50 per unit. A unit of Royal is produced using 4 machine hours in the machining department and 7 labour hours in the finishing department.
Required:
Use the reciprocal services method to allocate support department cost.
1. Calculate the overhead cost per unit of a Royal.
2. Calculate the unit product cost of a Royal.
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