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

Solution a:

From	Service Department Cost Allocation - Direct Method
	Support Department		Operating Departments
	CFL Group	Computer	Market Research	Financial Analysis
Direct charges of department	$210,000.00	$600,000.00	$1,250,000.00	$1,750,000.00
CFL (15:75)	-$210,000.00		$35,000.00	$175,000.00
Computer (40:40)		-$600,000.00	$300,000.00	$300,000.00
Total	$0.00	$0.00	$1,585,000.00	$2,225,000.00

solution b:

From	Service Department Cost Allocation - Step Method (Allocation of Computer first)
	Support Department		Operating Departments
	CFL Group	Computer	Market Research	Financial Analysis
Direct charges of department	$210,000.00	$600,000.00	$1,250,000.00	$1,750,000.00
Computer (20:40:40)	$120,000.00	-$600,000.00	$240,000.00	$240,000.00
CFL (15:75)	-$330,000.00		$55,000.00	$275,000.00
Total	$0.00	$0.00	$1,545,000.00	$2,265,000.00

Solution c:

Service department cost = Direct Cost + Allocated Cost

CFL Cost = $210,000 +20% of computer cost

= $210,000 + 0.20*Computer Group cost

Computer Group Cost = $600,000 + 10% of CFL Group cost

= $600,000 + 0.10 * CFL Group Cost

Computer Group Cost = $600,000 + 0.10 ($210,000 + 0.20*Computer Cost)

Computer Cost = $600,000 + $21,000 + 0.02*Computer Cost

Computer Cost = $621,000 / 0.98 = $633,673

CFL Group Cost = $210,000 + 0.20*$633,673 = $336,735

From	Service Department Cost Allocation - Reciprocal Method
	Support Department		Operating Departments
	CFL Group	Computer	Market Research	Financial Analysis
Direct charges of department	$210,000	$600,000	$1,250,000	$1,750,000
CFL (10:15:75)	-$336,735	$33,673	$50,510	$252,551
Computer (20:40:40)	$126,735	-$633,673	$253,469	$253,469
Total	$0	$0	$1,553,979	$2,256,020