Music for All Company (MAC) was established in Parramatta in 2000 by Robert Chan. MAC manufactures guitar for leisure music industry. The company has two production departments: Machining and Finishing. There are also two support departments: Human Resources (HR), and Maintenance. The budgeted overhead costs for the year for each department are as follows;
HR $600 000
Maintenance $400 000
Machining $1 000 000
Finishing $800 000
The budgeted machine hours for the Machining Department are 50 000, and the budgeted direct labour hours for the Finishing Department are 30 000. These activities are used to allocate manufacturing overhead costs to products in the two departments The usage of the support departments' output for the year is as follows:
Provision of Service Output (hours of service
Provider of the service
User of service HR Maintenance
HR - 1200
Maintenance 1000 -
Machining 4000 9000
Finishing 5000 1800
Total 10000 12000
Required:1. Explain briefly the main differences between the direct, step-down and reciprocal services methods of support department cost allocation. 2. Use the reciprocal method to allocate support costs to production departments, and determine the predetermined manufacturing overhead rates for the two production departments.