Question

Mushed’s String Company has two service departments, Maintenance and Personnel. Maintenance Department costs of $320,000 are allocated on the basis of budgeted maintenance-hours. Personnel Department costs of $80,000 are allocated based on the number of employees. The costs of operating departments A and B are $160,000 and $240,000, respectively. Data on budgeted maintenance-hours and number of employees are as follows:
	Support Departments		Production Departments
	Maintenance	Personnel	A	B
Budgeted costs	$320,000	$80,000	$160,000	$240,000
Budgeted maintenance-hours	NA	200	240	160	600
Number of employees	10	NA	40	120	170
Required:
Allocate the service department costs to the production departments using
1.     The Direct Allocation Method
2.     The Step Down Method
3.     The Reciprocal Method

Answer 1

Solution:

It is given that:

Budgeted costs	$ 160,000	$ 240,000	$      320,000	$ 80,000
	A	B	Maintenance	Personnel	Total
Maintenance	240	160	0	200	600
Personnel	40	120	10	0	170

Answer 1:

Direct Allocation Method:

	A	B	Maintenance	Personnel
Operating costs	$ 160,000	$ 240,000	$      320,000	$ 80,000
Maintenance	$ 192,000	$ 128,000	$    (320,000)
Personnel	$   20,000	$   60,000		$(80,000)
Total	$ 372,000	$ 428,000	$                -	$          -

Answer 2:

Step Down Method:

	A	B	Maintenance	Personnel
Operating costs	$ 160,000	$ 240,000	$      320,000	$    80,000
Maintenance	$ 128,000	$   85,333	$    (320,000)	$ 106,667
Total	$ 288,000	$ 325,333	$                -	$ 186,667
Personnel	$   46,667	$ 140,000	$                -	$(186,667)
Total	$ 334,667	$ 465,333	$                -	$             -

Answer 3:

Reciprocal Method:

Let the total cost of	Maintenance	be x.
Let the total cost of	Personnel	be y.

Now,

So, x = 320000 + 0.059y	---------Equation 1
y = 80000 + 0.33x	---------Equation 2

and,

Solving Equation 1 and 2:

Substitute value of 'y' from equation 2 in Equation 1-

So, x = 320000 + 0.059 (80000 + 0.33x)

So, x = $ 331200

The total cost of Maintenance is $ 331200

and,

Putting the value of x in equation 2-

So, y = 80000 + 0.33 * 331200

So, y = $ 190400

The total cost of Personnel is $ 190400

and,

	A	B	Maintenance	Personnel
Total cost	$ 160,000.00	$ 240,000.00	$ 320,000.00	$    80,000.00
Maintenance	$ 132,480.00	$   88,320.00	$(331,200.00)	$ 110,400.00
Total cost	$ 292,480.00	$ 328,320.00	$ (11,200.00)	$ 190,400.00
Personnel	$   44,800.00	$ 134,400.00	$    11,200.00	$(190,400.00)
Total cost	$337,280.00	$462,720.00	$            (0.00)	$                  -

In case of any doubt, please feel free to comment.