Question

Barfield Corporation prepares business plans and marketing analyses for startup companies in the Cleveland area. Barfield has been very successful in recent years in providing effective service to a growing number of clients. The company provides its service from a single office building in Cleveland and is organized into two main client-service groups: one for market research and the other for financial analysis. The two groups have budgeted annual costs of $1,250,000 and $1,750,000, respectively. In addition, Barfield has a support staff that is organized into two main functions: one for clerical, facilities, and logistical support (called the CFL group) and another for computer-related support. The CFL group has budgeted annual costs of $210,000, while the annual costs of the computer group are $600,000.

Tom Brady, CFO of Barfield, plans to prepare a departmental cost allocation for his four groups, and he assembles the following information.

Percentage of estimated dollars of work and time by CFL group:

10%—service to the computer group

15%—service to market research

75%—service to financial analysis

Percentage of estimated dollars of work and time by the computer group:

20%—service to the CFL group

40%—service to market research

40%—service to financial analysis

Required:
Determine the total cost in the financial analysis and market research groups, after departmental allocation, using (a) the direct method, (b) the step method when the sourcing department that provides the greatest percentage of services to other service departments goes first, and (c) the reciprocal method. (Round percentage calculations to 4 decimal places (e.g., 33.3333%), intermediate calculations and final answers to the nearest dollar amount.)

Answer 1

Direct method
	Computer group	CFL group	Market research	Financial analysis
Direct overhead	600,000	210,000	1,250,000	1,750,000
Allocated Computer group In Proportion of 40:40 respectively (40+40=80) (For market research = 600000*40/80)	(600,000)		300,000	300,000
Allocated CFL group In Proportion of 15:75 respectively		(210,000)	35,000	175,000
Total cost after departmental allocation using direct method	-	-	1,585,000	2,225,000
Step method with First Allocation of computer group
	Computer group	CFL group	Market research	Financial analysis
Direct overhead	600,000	210,000	1,250,000	1,750,000
Allocated Computer group In Proportion of 20:40:40 respectively (2040+40=100) (For market research = 600000*40/100)	(600,000)	120,000	240,000	240,000
Total	-	330,000	1,490,000	1,990,000
Allocated 330000 CFL group In Proportion of 15:75 respectively		(330,000)	55,000	275,000
Total cost after departmental allocation using step method	-	-	1,545,000	2,265,000
Reciprocal method
	Computer group	CFL group	Market research	Financial analysis
Direct overhead	600,000.00	210,000.00	1,250,000.00	1,750,000.00
Allocated Computer group In Proportion of 20:40:40 respectively	(600,000.00)	120,000.00	240,000.00	240,000.00
Total	-	330,000.00	1,490,000.00	1,990,000.00
Allocated CFL group In Proportion of 10:15:75 respectively	33,000.00	(330,000.00)	49,500.00	247,500.00
Total	33,000.00	-	1,539,500.00	2,237,500.00
Allocated Computer group In Proportion of 20:40:40 respectively	(33,000.00)	6,600.00	13,200.00	13,200.00
Total	-	6,600.00	1,552,700.00	2,250,700.00
Allocated CFL group In Proportion of 10:15:75 respectively	660.00	(6,600.00)	990.00	4,950.00
Total	660.00	-	1,553,690.00	2,255,650.00
Allocated Computer group In Proportion of 20:40:40 respectively	(660.00)	132.00	264.00	264.00
Total	-	132.00	1,553,954.00	2,255,914.00
Allocated CFL group In Proportion of 10:15:75 respectively	13.20	(132.00)	19.80	99.00
Total	13.20	-	1,553,973.80	2,256,013.00
Allocated Computer group In Proportion of 20:40:40 respectively	(13.20)	2.64	5.28	5.28
Total	-	2.64	1,553,979.08	2,256,018.28
Allocated CFL group In Proportion of 10:15:75 respectively	0.26	(2.64)	0.40	1.98
Total cost after departmental allocation using reciprocal method	0	-	1,553,979	2,256,020