Direct Method, Reciprocal Method, Overhead Rates

Macalister Corporation is developing departmental overhead ratesbased on direct labor hours for its two productiondepartments—Molding and Assembly. The Molding Department employs 16people, and the Assembly Department employs 77 people. Each personin these two departments works 2,020 hours per year. Theproduction-related overhead costs for the Molding Department arebudgeted at $198,000, and the Assembly Department costs arebudgeted at $83,000. Two support departments—Engineering andGeneral Factory—directly support the two production departments andhave budgeted costs of $208,000 and $393,000, respectively. Theproduction departments’ overhead rates cannot be determined untilthe support departments’ costs are properly allocated. Thefollowing schedule reflects the use of the Engineering Department’sand General Factory Department’s output by the variousdepartments.

	Engineering	General Factory	Molding	Assembly
Engineering hours	—	2,000	2,300	7,700
Square feet	98,240	—	417,520	98,240

For all requirements, round allocation ratios to foursignificant digits and round allocated costs to the nearestdollar.

Required:

1. Calculate the overhead rates per directlabor hour for the Molding Department and the Assembly Departmentusing the direct allocation method to charge the productiondepartments for support department costs. Round final answers tothe nearest cent.

	Overhead rate per DLH
Molding	$
Assembly	$

2. Calculate the overhead rates per directlabor hour for the Molding Department and the Assembly Departmentusing the reciprocal method to charge support department costs toeach other and to the production departments. Round final answersto the nearest cent. Round your intermediate calculations to fourdecimal places.

	Overhead rate per DLH
Molding	$
Assembly	$

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

The reciprocal allocation method is preferred because itrecognizes that all support departments serve one another.

Feedback

1. Overhead rate is computed by adding theallocated service costs to the overhead costs that are directlytraceable to the producing department and dividing this total bysome measure of activity, such as direct labor hours or machinehours.

2. The reciprocal method, as well as direct andsequential methods, allocates all support department costs to theproducing departments.

3. Consider the various methods and why youmight prefer one versus another.