Question

Data Performance, a computer software consulting company, has three major functional areas: computer programming, information systems consulting, and software training. Carol Bingham, a pricing analyst, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Carol is considering three different methods of the departmental allocation approach to allocate overhead costs: the direct method, the step method, and the reciprocal method. She assembled the following data from the two service departments, information systems and facilities: Service Departments Production Departments Information Systems Facilities Computer Programming Information Systems Consulting Software Training Total Budgeted overhead (base) $88,000 $48,000 $151,000 $198,000 $137,000 $622,000 Information Systems (computer hours) 2,000 1,000 2,000 5,000 10,000 Facilities (square feet) 280 280 560 1,680 2,800 Required: 1. Using computer usage time as the allocation base for the information systems department and square feet of floor space as the application base for the facilities department, apply overhead from these service departments to the production departments, using these three methods: a. Direct method. b. Step method (both for the information systems department going first and for the facilities department going first). c. Reciprocal method. (Round percentage calculations to 4 decimal places (e.g., 33.3333%). For all requirements, Do not round your intermediate calculations. Round your final answers to nearest whole dollar amount.)

Answer 1

(A)	Direct Method
	Let Prodution Departments are A,B,C,D & Service Departments are S1&S2
	Under Direct Method the cost of service departments are allocated only to the Production department
	Sq feet Ratio is 1:1:2:6:10
	Hous ratio Is   2:1:2:5:10
	Department	Cost	A	B	C	D	Total
	Computer hours		1	2	5	10	18
	Sq feet		1	2	6	10	19
	S1	88000	4889	9778	24444	48889	88000
	S2	48000	2526	5053	15158	25263	48000
	A	151000	151000				151000
	B	198000		198000			198000
	C	137000			137000		137000
	D	622000				622000	622000
	Total	1244000	158415.2	212830.4	176602.3	696152	1244000
(B)	Step Method
	In Step Method allocate cost of service department to other service department as well to production department
	Department	Cost	S1	S2	A	B	C	D	Total
	Computer hours			2	1	2	5	10	20
	Sq feet		1		1	2	6	10	20
	S1	88000	0	8800	4400	8800	22000	44000	88000
	S2	48000	2400	0	2400	4800	14400	24000	48000
	A	151000			151000				151000
	B	198000				198000			198000
	C	137000					137000		137000
	D	622000						622000	622000
	Total	1244000	2400	8800	157800	211600	173400	690000	1244000
(C)	Reciprocal Method
	In the reciprocal method, the relationship between the service departments is recognized. This means service department costs are allocated to and from the other service departments.
		Hours			Sq feet
	S1				280	280/5600
	S2	2000	2000/20000
	A	1000	1000/20000		280	280/5600
	B	2000	2000/20000		560	560/5600
	C	5000	5000/20000		1680	1680/5600
	D	10000	10000/20000		2800	2800/5600
		20000			5600
	Using algebra, we can assign Total Facility cost a variable of A giving the formula:
	A	48000+(2/20*[(88000+(280/5600)A]
		48000+8800+0.005A
	0.995A	56800
	A	57085
	S2	57085
	S1	90854
	Department	Cost	S1	S2	A	B	C	D	Total
	Computer hours			2	1	2	5	10	20
	Sq feet		1		1	2	6	10	20
	S1	90854	0	9085	4543	9085	22714	45427	90854
	S2	57085	2854	0	2854	5709	17126	28542.5	57085
	A	151000			151000				151000
	B	198000				198000			198000
	C	137000					137000		137000
	D	622000						622000	622000
	Total	1255939	2854.25	9085.4	158397	212793.9	176839	695969.5	1255939