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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 separate fixed and variable costs; however, only budgeted costs are allocated. Allocations for the coming year are based on the following data: 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.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 7, Problem 35P
Textbook Problem
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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 separate fixed and variable costs; however, only budgeted costs are allocated. Allocations for the coming year are based on the following data:

Chapter 7, Problem 35P, Duweynie Pottery, Inc., is divided into two operating divisions: Pottery and Retail. The company

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

Required:

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

1.

To determine

Allocate the support service costs using the direct method.

Explanation of Solution

Direct method of allocation: In direct method of allocation, companies assign support department costs only to the producing departments. This method is the simpler and straightforward for assigning support department costs.

Calculate the allocation ratio:

Proportion of:PotteryRetail
Machine hours (1)0.69(2)0.31
Square footage (3)0.4(4)0.6

Table (1)

Calculate allocation of costs:

Figure (1)

Working notes:

(1)Calculate the allocation of machine hours to pottery:

Allocation of machine hours to pottery}=MachinehoursofpotteryMachinehoursofpottery+Machinehoursofretail=6,9006,900+3,100=6,90010,000=0.69

(2)Calculate the allocation of machine hours to retail:

Allocation of machine hours to retail}=MachinehoursofretailMachinehoursofpottery+Machinehoursofretail=3,1006,900+3,100=3,10010,000=0

2.

To determine

Allocate the support service costs using the sequential method.

3.

To determine

Allocate the support service costs using the reciprocal method.

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Chapter 7 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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