Question

Robinson Products Company has two service departments (S1 and S2) and two production departments (P1 and P2). The distribution of each service department’s efforts (in percentages) to the other departments is:

From	To
	S1		S2			P1			P2
S1	—			10	%		20	%		?	%
S2	10	%		—			?			30

The direct operating costs of the departments (including both variable and fixed costs) are:

S1	$	180,000
S2		60,000
P1		50,000
P2		120,000

Required:

1. Determine the total cost of P1 and P2 using the direct method.

Production Dept. 1:

Production Dept. 2:

2. Determine the total cost of P1 and P2 using the step method.

Production Dept. 1:

Production Dept. 2:

3. Determine the total cost of P1 and P2 using the reciprocal method.

Production Dept. 1:

Production Dept. 2:

Answer 1

Solution 1:

From	Service Department Cost Allocation - Direct Method
	Service Department		Production Departments
	S1	S2	P1	P2
Direct charges of department	$180,000.00	$60,000.00	$50,000.00	$120,000.00
S1 (2:7)	-$180,000.00		$40,000.00	$140,000.00
S2 (6:3)		-$60,000.00	$40,000.00	$20,000.00
Total	$0.00	$0.00	$130,000.00	$280,000.00

Solution 2:

From	Service Department Cost Allocation - Step Method (Allocation of S1 first)
	Service Department		Production Departments
	S1	S2	P1	P2
Direct charges of department	$180,000.00	$60,000.00	$50,000.00	$120,000.00
S1 (1:2:7)	-$180,000.00	$18,000.00	$36,000.00	$126,000.00
S2 (6:3)		-$78,000.00	$52,000.00	$26,000.00
Total	$0.00	$0.00	$138,000.00	$272,000.00

From	Service Department Cost Allocation - Step Method (Allocation of S2 first)
	Service Department		Production Departments
	S1	S2	P1	P2
Direct charges of department	$180,000	$60,000	$50,000	$120,000
S2 (1:6:3)	$6,000	-$60,000	$36,000	$18,000
S1 (2:7)	-$186,000		$41,333	$144,667
Total	$0	$0	$127,333	$282,667

Solution 3:

Service department cost = Direct Cost + Allocated Cost

S1 Cost = $180,000 + 0.10* S2 cost

S2 Cost = $60,000 + 0.10 S1 cost

S2 Cost = $60,000 + 0.10 ($180,000 + 0.10*S2 Cost)

S2 Cost = $60,000 + $18,000 + 0.01*S2 Cost

S2 Cost = $78,000 / 0.99 = $78,788

S1 Cost = $180,000 + 0.10*$78,788 = $187,879

From	Service Department Cost Allocation - Reciprocal Method
	Service Department		Production Departments
	S1	S2	P1	P2
Direct charges of department	$180,000	$60,000	$50,000	$120,000
S1 (1:2:7)	-$187,879	$18,788	$37,576	$131,515
S2 (1:6:3)	$7,879	-$78,788	$47,273	$23,636
Total	$0	$0	$134,849	$275,152