Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 28

Cost Allocation: Reciprocal Method, Two Service Departments

During the past month, the following costs were incurred in the three production departments and two service departments of Postaic Company:

Using Department
Supplying Department	Administration	Factory Support	Fabrication	Assembly	Finishing
Administration	—	0.40	0.30	0.20	0.10
Factory support	0.10	—	0.20	0.15	0.55
Direct cost	$120,000	$312,500	$390,000	$67,000	$59,500

Required

Allocate service department costs to Fabrication, Assembly, and Finishing using the reciprocal method, and determine the total costs of Fabrication, Assembly, and Finishing after this allocation.

Step 1 of 2

Cost Allocation:

It is the method or process which identifies and aggregates and assigns the cost to different cost objects. It is the process through which costs incurred in which costs incurred in the service departments are allocated to the production departments.

Mechanism of cost allocation involves:

• Accumulating the costs in different drivers or pools.

• Identifying the most appropriate basis / method for allocating the cost.

• Identifying the drivers to which the cost must be assigned.