Question

1.

Looking to compare, thanks.

A) Allocate the two support departments' costs to the two operating departments using the following methods?

Direct Method
Step-down method (Allocate AS first)
Step -down method (Allocate IS first)

B) Compare and Explain differences in the support department costs allocated to each operating department?

C) What approaches might be used to decide the sequence in which to allocate support departments when using the step-down method?

					Support			Operating
					AS	IS		GOVT	CORP	Total
Budgeted Overhead Costs Before any
interdepartment cost allocations					600000	2400000		8756000	12452000	24208000
Support work supplied by AS
(budgeted head count)					0	0.25		0.4	0.35	100%
Support work supplied by IS
(budgeted computer time)					0.1	0		0.3	0.6	100%

Answer 1

Direct Method AS IS Govt. Corp. Costs $600,000 $2,400,000 Alloc. of AS costs (40/75, 35/75) (600,000) $ 320,000 $ 280,000 Alloc. of IS costs (30/90, 60/90) (2 ,400,000 ) 800 ,000 1 ,600,000 $ 0 $ 0 $1 ,120,000 $1 ,880,000 b. Step-Down (AS first) Costs $600,000 $2,400,000 Alloc. of AS costs (0.25, 0.40, 0.35) (600,000) 150,000 $ 240,000 $ 210,000 Alloc. of IS costs (30/90, 60/90) (2 ,550,000 ) 850 ,000 1 ,700,000 $ 0 $ 0 $1 ,090,000 $1 ,910,000 c. Step-Down (IS first) Costs $600,000 $2,400,000 Alloc. of IS costs (0.10, 0.30, 0.60) 240,000 (2,400,000)$ 720,000 $1,440,000 Alloc. of AS costs (40/75, 35/75) (840 ,000 ) 448 ,000 392,000 $ 0 $ 0 $1,168,000 $1,832,000 2. Govt. Corp. Direct method $1,120,000 $1,880,000 Step-Down (AS first) 1,090,000 1,910,000 Step-Down (IS first) 1,168,000 1,832,000 The direct method ignores any services to other support departments. The step-down method partially recognizes services to other support departments. The information systems support group (with total budget of $2,400,000) provides 10% of its services to the AS group. The AS support group (with total budget of $600,000) provides 25% of its services to the information systems support group

3. Three criteria that could determine the sequence in the step-down method are: a. Allocate support departments on a ranking of the percentage of their total services provided to other support departments. 1. Administrative Services 25% 2. Information Systems 10% b. Allocate support departments on a ranking of the total dollar amount in the support departments. 1. Information Systems $2,400,000 2. Administrative Services $ 600,000 c. Allocate support departments on a ranking of the dollar amounts of service provided to other support departments 1. Information Systems (0.10  $2,400,000) = $240,000 2. Administrative Services (0.25  $600,000) = $150,000 The approach in (a) above typically better approximates the theoretically preferred reciprocal method. It results in a higher percentage of support-department costs provided to other support departments being incorporated into the step-down process than does (b) or (c), above.