Support Department Cost Allocation Using the Algebraic or Reciprocal Method The algebraic or reciprocal...

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Accounting

Support Department Cost Allocation Using the Algebraic or Reciprocal Method
The algebraic or reciprocal method takes full account of support department reciprocity. This method requires the solution of a system of simultaneous equations to determine the total support department costs to be allocated. In practice, relatively few companies use the reciprocal method.
Let's use Anders Company, as an example. Anders has two producing departments - Cutting and Sewing - and two support departments - Maintenance and General Factory (GF). Anders provided the following information on the four departments:
Maintenance GF Cutting Sewing
Direct overhead cost $100,000 $270,000 $56,400 $75,000
Machine hours 4592,0009,0009,000
Square footage 2,5003,4185,0008,500
Anders uses the algebraic method of support department cost allocation. Maintenance is allocated based on machine hours, and GF on the basis of square footage.
Calculate the allocation ratios to five significant digits and fill them into the following table (Leave cells blank that do not require an entry.):
Maintenance GF Cutting Sewing
General Factory fill in the blank 443729f7805cf9e_1 fill in the blank 443729f7805cf9e_2 fill in the blank 443729f7805cf9e_3 fill in the blank 443729f7805cf9e_4
Maintenance fill in the blank 443729f7805cf9e_5 fill in the blank 443729f7805cf9e_6 fill in the blank 443729f7805cf9e_7 fill in the blank 443729f7805cf9e_8
Using the allocation ratios, solve a system of simultaneous equations for support department cost as follows.
Maintenance = $100,000+0.15625 GF
GF = $270,000+0.1 Maintenance
Substituting Maintenance into the equation for GF and solving for GF:
GF = $270,000+0.1($100,000+0.15625 GF)
GF = $270,000+ $10,000+0.015625 GF
0.984375 GF = $280,000
GF = $284,444
Then,
Maintenance = $100,000+0.15625($284,444)= $144,444
Using the newly calculated amounts for GF and Maintenance and the allocation ratios, fill in the following table to allocate support department costs to the producing departments. (Round all allocated amounts to the nearest dollar. Leave cells blank that do not require an entry.)
Maintenance GF Cutting Sewing
Direct overhead cost $100,000 $270,000 $56,400 $75,000
Allocate:
General Factory fill in the blank 443729f7805cf9e_9 fill in the blank 443729f7805cf9e_10 fill in the blank 443729f7805cf9e_11 fill in the blank 443729f7805cf9e_12
Maintenance fill in the blank 443729f7805cf9e_13 fill in the blank 443729f7805cf9e_14 fill in the blank 443729f7805cf9e_15 fill in the blank 443729f7805cf9e_16
Total after allocation fill in the blank 443729f7805cf9e_17 fill in the blank 443729f7805cf9e_18 fill in the blank 443729f7805cf9e_19 fill in the blank 443729f7805cf9e_20
Notice that after allocation, zero dollars remain in the support departments and all overhead cost has been allocated to the producing departments. As a check on your work, add all direct overhead costs from the first line - it equals $501,400. Then add the totals after allocation - again, it equals $501,400.

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