Question

Direct Method, Reciprocal Method, Overhead Rates

Macalister Corporation is developing departmental overhead rates based on direct labor hours for its two production departments—Molding and Assembly. The Molding Department employs 23 people, and the Assembly Department employs 81 people. Each person in these two departments works 2,010 hours per year. The production-related overhead costs for the Molding Department are budgeted at $238,000, and the Assembly Department costs are budgeted at $91,000. Two support departments—Engineering and General Factory—directly support the two production departments and have budgeted costs of $246,000 and $350,000, respectively. The production departments’ overhead rates cannot be determined until the support departments’ costs are properly allocated. The following schedule reflects the use of the Engineering Department’s and General Factory Department’s output by the various departments.

	Engineering	General Factory	Molding	Assembly
Engineering hours	—	1,900	2,100	7,900
Square feet	134,820	—	442,980	64,200

For all requirements, round allocation ratios to four significant digits and round allocated costs to the nearest dollar.

Required:

1. Calculate the overhead rates per direct labor hour for the Molding Department and the Assembly Department using the direct allocation method to charge the production departments for support department costs. Round final answers to the nearest cent.

	Overhead rate per DLH
Molding	$
Assembly	$

2. Calculate the overhead rates per direct labor hour for the Molding Department and the Assembly Department using the reciprocal method to charge support department costs to each other and to the production departments. Round final answers to the nearest cent. Round your intermediate calculations to four decimal places.

	Overhead rate per DLH
Molding	$
Assembly	$

3. Explain the difference between the methods, and indicate the arguments generally presented to support the reciprocal method over the direct allocation method. (CMA adapted)

Answer 1

	Molding	Assembly
Direct labor hour per employee	2,010	2,010
Multiply: Number of employees	23	81
Direct labor hours	46,230	162,810

Answer 1

Direct method
Department	Engineering	General Factory	Molding	Assembly
Direct overhead	246,000	350,000	238,000	91,000
Allocated Engineering In Proportion of 2100 : 7900 respectively (2100+7900=10000) (For Molding = 246000*2100/10000)	(246,000)		51,660	194,340
Allocated General Factory In Proportion of 442980 : 64200 respectively (442980+64200=507180) (For Molding = 350000*442980/507180)		(350,000)	305,696	44,304
Total cost after departmental allocation using direct method	-	-	$          595,356	$          329,644
Divided by: Number of Direct labor hours			46,230	162,810
Overhead rate per DLH using direct method			$              12.88	$                 2.02

Answer 2

Reciprocal method
Department	Engineering	General Factory	Molding	Assembly
Direct overhead	246,000.00	350,000.00	238,000.00	91,000.00
Allocated Engineering In Proportion of 1900 : 2100 : 7900 respectively	(246,000.00)	39,277.31	43,411.76	163,310.92
Total	-	389,277.31	281,411.76	254,310.92
Allocated General Factory In Proportion of 134820 : 442980 : 64200 respectively	81,748.24	(389,277.31)	268,601.34	38,927.73
Total	81,748.24	-	550,013.11	293,238.66
Allocated Engineering In Proportion of 1900 : 2100 : 7900 respectively	(81,748.24)	13,052.24	14,426.16	54,269.84
Total	-	13,052.24	564,439.27	347,508.49
Allocated General Factory In Proportion of 134820 : 442980 : 64200 respectively	2,740.97	(13,052.24)	9,006.05	1,305.22
Total	2,740.97	-	573,445.31	348,813.72
Allocated Engineering In Proportion of 1900 : 2100 : 7900 respectively	(2,740.97)	437.63	483.70	1,819.64
Total	-	437.63	573,929.01	350,633.35
Allocated General Factory In Proportion of 134820 : 442980 : 64200 respectively	91.90	(437.63)	301.97	43.76
Total	91.90	-	574,230.98	350,677.12
Allocated Engineering In Proportion of 1900 : 2100 : 7900 respectively	(91.90)	14.67	16.22	61.01
Total	-	14.67	574,247.20	350,738.13
Allocated General Factory In Proportion of 134820 : 442980 : 64200 respectively	3.08	(14.67)	10.12	1.47
Total	3.08	-	574,257.32	350,739.59
Allocated Engineering In Proportion of 1900 : 2100 : 7900 respectively	(3.08)	0.49	0.54	2.05
Total	-	0.49	574,257.87	350,741.64
Allocated General Factory In Proportion of 134820 : 442980 : 64200 respectively	0.10	(0.49)	0.34	0.05
Total cost after departmental allocation using Reciprocal method	-	-	$          574,258	$          350,742
Divided by: Number of Direct labor hours			46,230	162,810
Overhead rate per DLH using Reciprocal method			$              12.42	$                 2.15

we can stop the same process when the Balance left in service Departments become negligible.

Answer 3

Direct method of allocation should ignore any service rendered by one service (support) department to another support department. It is allocated the cost of the service department to directly to the production department without allocating the o service department.

Reciprocal method of allocation should to the production department as well as other services (support) department (in case of any service (support) render to other service departments.)

Reciprocal method of allocation is most useful because of under this method, Cost of service department should be allocated to all departments, irrespective of support department or production department.