Answered Essay: Problem: Magee Engineering (Service Department Cost Allocation) Budgeted cost data for the production and service departme

Problem: Magee Engineering (Service Department Cost Allocation) Budgeted cost data for the production and service departments of Magee Engineering are as follows:

Machining $ 400,000

Assembly 200,000

Plant Maintenance 600,000

Information Systems 116,000

Total $1,316,000

Of its 8,000 budgeted direct labor hours, Plant Maintenance plans to spend 1,600 direct labor hours furnishing service to Information Systems, 2,400 direct labor hours for Machining, and 4,000 for Assembly. Of its 2,000 hours of budgeted computer time, Information Systems plans to spend 200 computer hours on work for Plant Maintenance, 1,600 computer hours for Machining, and 200 computer hours for Assembly.

Required: (1) Determine the costs allocated to the production departments using the direct method and the reciprocal method

Expert Answer


A)Allocation under Direct method:

Service department Total hours for allocation Production department
Machining Assembly
Direct cost 400000 200000
Plant Maintenance [600000/6400=$ 93.75] 2400+4000=6400 2400*93.75=$ 225000 4000*93.75= $ 375000
Information Systems [116000/1800 =$ 64.44444] 1600+200 = 1800 64.44444*1600=$ 103111 64.44444*200=$ 12889
Total 728111 587889

reciprocal method:Let total information system cost be X,and total plant maintenance cost be y

Total plant maintenance cost =Direct cost + allocation from information system department cost

y    = 600000 +[x*200/2000]

y= 600000+ .10 x          [equation 1 ]

Total information cost :X = 116000+ [y*1600/8000]

x = 116000+ .20 y

putting the value of y from equation 1 to this equation

x = 116000+ .20[600000+.10x]

= 116000+ 120000+.02x

x-.02x = 236000

.98x = 236000

x(total information system cost] = 236000/.98 =$ 240816

Total plant maintenance cost :600000+.10(240816)

= 600000+ 24082

= $ 624082


Machining Assembly
Direct cost 400000 200000
Plant Maintenance [624082/8000= $ 78.01025] 2400*78.01025= $ 187225 4000*78.01025=$ 312041
Information system [240816/2000=$120.408] 1600*120.408=$ 192653 200*120.408=$ 24081
Total 779878 536122
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