Question

Support Department Cost Allocation—Reciprocal Services Method

Blue Africa Inc. produces laptops and desktop computers. The company’s production activities mainly occur in what the company calls its Laser and Forming departments. The Cafeteria and Security departments support the company’s production activities and allocate costs based on the number of employees and square feet, respectively. The total cost of the Security Department is $266,000. The total cost of the Cafeteria Department is $638,000. The number of employees and the square footage in each department are as follows:

	Employees		Square Feet
Security Department	10		570
Cafeteria Department	28		2,400
Laser Department	40		4,000
Forming Department	50		1,600

Using the reciprocal services method of support department cost allocation, determine the total costs from the Security Department that should be allocated to the Cafeteria Department and to each of the production departments.

Cafeteria
DepartmentLaser
DepartmentForming
DepartmentSecurity Department cost allocation$$$

Answer 1

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	Cafeteria Department	Laser Department	Forming Department
Security Departmentl cost allocation	$    102,000	$     170,000	$          68,000
Workings:
Let Total Security department cost be x and of Cafeteria be y
x = 266000 + (10/100 * y)
y = $638000 + (2400/8000 * x)
By solving above:
y = $638000 + (2400/8000 * x)
y = $638000 + [2400/8000 *( 266000 + (10/100 * y)]
y = $740000
also,
x = 266000 + (10/100 * y)
x = 266000 + (10/100 * 740000)
x = $340000
Security Departmentl cost allocation
Cafeteria Department = [$340000 * (2400/8000)] = $102000
Laser Department = [$340000 * (4000/8000)] = $170000
Forming Department = [$340000 * (1600/8000)] = $68000