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 $550,000 and $840,000, 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 $513,000, while the annual costs of the computer group are $624,000.

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

20%—service to market research

70%—service to financial analysis

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

20%—service to the CFL group

60%—service to market research

20%—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
Department	Computer group	CFL group	Market research	Financial analysis
Budgeted annual cost	624000	513000	550000	840000
Computer group allocated cost 60:20 respectively (for market research =624000*60/80) same for other	-624000		468000	156000
CFL group allocated cost 20:70 respectively		-513000	114000	399000
Total cost after departmental allocation	0	0	$        1,132,000	$        1,395,000
Step method
Department	Computer group	CFL group	Market research	Financial analysis
Budgeted annual cost	624000	513000	550000	840000
Computer group allocated cost 20:60:20 respectively (for market research =624000*60/100) same for other	-624000	124800	374400	124800
Total	0	637800	924400	964800
CFL group cost 637800 allocated cost 20:70 respectively		-637800	141733.3333	496066.6667
Total cost after departmental allocation	0	0	$        1,066,133	$        1,460,867
Reciprocal method
Department	Computer group	CFL group	Market research	Financial analysis
Budgeted annual cost	624000.00	513000.00	550000.00	840000.00
Computer group allocated cost 20:60:20 respectively	-624000.00	124800.00	374400.00	124800.00
Total	0.00	637800.00	924400.00	964800.00
CFL group allocated cost 10:20:70 respectively	63780.00	-637800.00	446460.00	127560.00
Total	63780.00	0.00	1370860.00	1092360.00
Computer group allocated cost 20:60:20 respectively	-63780.00	12756.00	38268.00	12756.00
Total	0.00	12756.00	1409128.00	1105116.00
CFL group allocated cost 10:20:70 respectively	1275.60	-12756.00	8929.20	2551.20
Total	1275.60	0.00	1418057.20	1107667.20
Computer group allocated cost 20:60:20 respectively	-1275.60	255.12	765.36	255.12
Total	0.00	255.12	1418822.56	1107922.32
CFL group allocated cost 10:20:70 respectively	25.51	-255.12	178.58	51.02
Total	25.51	0.00	1419001.14	1107973.34
Computer group allocated cost 20:60:20 respectively	-25.51	5.10	15.31	5.10
Total	0.00	5.10	1419016.45	1107978.45
CFL group allocated cost 10:20:70 respectively	0.51	-5.10	3.57	1.02
Total	0.51	0.00	1419020.02	1107979.47
Computer group allocated cost 20:60:20 respectively	-0.51	0.10	0.31	0.10
Total cost after departmental allocation	0.00	$                0	$        1,419,020	$        1,107,980