Crystal Magic Company is developing departmental overhead rates based on direct-labor hours for its two production departments in the production of light-catcher art pieces, Etching and Assembly. The Etching Department employs 12 people and the Assembly Department employs 48 people. Each person in these two departments works 2,000 hours per year. The production-related overhead costs for the Etching Department are budgeted at $400,000, and the Assembly Department costs are budgeted at $640,000. Two service departments, Maintenance and Computing, directly support the two production departments. These service departments have budgeted costs of $96,000 and $500,000, respectively. The production departments' overhead rates cannot be determined until the service departments' costs are
allocated. The following schedule reflects the use of the Maintenance Department's and Computing Department's output by the various departments.
Using Department Service Department Maintenance Computing Etching Assembly Maintenance (maintenance hours) 0 1,000 1,000 8,000 Computing (minutes)240,000 0 840,000 120,000 Required:(Use M for Maintenance and C for Computing in your equations.)1. What is the equation for the total cost of the maintenance department when using the reciprocal services method? 2. What is the equation for the total cost of the computing department when using the reciprocal services method?3. Solve each equation.4. Using the reciprocal-services method to allocate service department costs, calculate the overhead rates per direct-labor hour for the Etching Department and the Assembly Department.
What will be an ideal response?
1. Reciprocal-services method: Equations for Maintenance: M = 96,000 + .2C
2. Reciprocal-services method: Equations for Computing: C = 500,000 + .1M
M = 96,000 + .2 (500,000 + .1M)
M = 96,000 + 100,000 + .02M
.98 M = 196,000
M = 200,000
C = 500,000 + .1 (200,000)
C = 520,000
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