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

Exercise 47

Cost Allocation: Step and Reciprocal Methods

Farmington Components has two production departments (Fabrication and Assembly) and three service departments (Engineering, Administration, and Maintenance). During July, the following costs and service department usage ratios were recorded:

Using Department
Supplying Department	Engineering	Administration	Maintenance	Fabrication	Assembly
Engineering	-0-	50%	-0-	10%	40%
Administration	20%	-0-	10%	50%	20%
Maintenance	-0-	20%	-0-	30%	50%
Direct cost	$200,000	$950,000	$250,000	$1,750,000	$500,000

Required

Allocate the service department costs to the two operating departments using the reciprocal method. (Hint: You do not need to use a computer or study the Appendix in this chapter.)