Question

The Fleming Foundation is a charitable organization founded by Gaylord Fleming and Sandy Fleming. The Flemings intended for the charity to provide programs in health care for the elderly, particularly those in poverty. The two main program divisions of the foundation are mental health for the elderly and housing for the elderly. In addition to these programs, the Foundation also provides health care educational programs and has a significant fund-raising effort to help the Foundation grow and accomplish the goals of the founders. The Foundation is organized into two operating departments—education and program management. These departments are supported by two service departments—information technology (IT) and administration. To summarize, there are four departments (two service departments and two operating departments) and two programs (mental health and housing for the elderly). The service department costs are allocated to the operating departments, and then the operating department costs are allocated to the programs.

There are $260,000 of costs directly traceable to each of the four departments. An additional $46,500 of indirect costs is shared among the four departments—$25,500 of which is allocated to the departments based on labor hours and $21,000 of which is allocated to the departments based on the number of personnel (head count) in the departments.

The cost, labor hours, and head count in these departments in the most recent year are as follows:

Departments	Direct Cost				Labor Hours				Head Count
Information technology	$	5,000				2,000				1
Administration		126,000				2,000				4
Education		100,000				4,000				4
Program management		29,000				2,000				3
	$	260,000

IT serves education, administration, and program management 20%, 20%, and 60% of its time, respectively. Administration serves education, IT, and program management 40%, 10%, and 50% of its time, respectively.

The costs of the two operating departments (education and program management) are allocated to the two programs (mental health and housing) as follows: the costs in Education are allocated on the basis of labor hours in the programs, while the costs in program management are allocated using the head count used in the two programs. The following table shows the labor hours and head count consumption by the two programs.

	Labor Hours				Head Count
Mental health		1,000				1
Housing		1,000				2
Labor hours in education		2,000
Head count in program management						3

Required:

Determine the costs allocated to the mental health and housing programs using the (a) direct method, (b) the step method (assuming that IT goes first), and (c) the reciprocal method. (Round percentage calculations to 4 decimal places (e.g., 33.3333%). Do not round intermediate calculations. Round your final answer to nearest whole dollar amount.)

Answer 1

	Allocation of cost
a	Direct method
		Service Departments		Operating Departments
		Information Technology	Administration	Education	Program Management	Total
	Direct Cost	$5,000	$126,000	$100,000	$29,000	$260,000
	Indirect Costs based on labor hours	$5,100	$5,100	$10,200	$5,100	$25,500
	Indirect Costs based on head count	$1,750	$7,000	$7,000	$5,250	$21,000
	Information technology cost allocation	($11,850)		$2,963	$8,888	$0
	Administration cost allocation		($138,100)	$61,377.78	$76,722.22	$0
				$181,540	$124,960	$306,500
		Operating Departments
		Education	Program Management	Total
	IT serves	20%	60%	80%
	Percentage	25.00%	75.00%
	Administration serves	40%	50%	90%
	Percentage of usage	44.4444%	55.5556%
b	Step method
	IT department going first
		Service Departments		Operating Departments
		Information Technology	Administration	Education	Program Management	Total
	Direct Cost	$5,000	$126,000	$100,000	$29,000	$260,000
	Indirect Costs based on labor hours	$5,100	$5,100	$10,200	$5,100	$25,500
	Indirect Costs based on head count	$1,750	$7,000	$7,000	$5,250	$21,000
	IT cost allocation	($11,850)	$2,370	$2,370	$7,110	$0
	Administration cost allocation		($140,470)	$62,431	$78,039	$0
	Total Cost			$182,001	$124,499	$306,500
			Production Departments
		Administration	Education	Program Management	Total
	IT serves	20%	20%	60%	100%
	Percentage	20.0000%	20.0000%	60.0000%
	Adminstration serves		40%	50%	90%
	Percentage of usage		44.4444%	55.5556%
c	Reciprocal method
	Original cost of service departments
	IT (X)	$11,850
	Administration (Y)	$138,100
	After getting the share from distribution of service department
	X = $11850 +10% Y
	Y = $138100 + 20% X
	By putting the value of facilities in equation (1)
	X = $11850+10% ($138100 +20%X)
	X = $11850+ $13810 + 0.02X
	X-0.02X = $25660
	0.98 x = $25660
	X = $25660/0.98 = $26183.67
	By putting the value of information system in Equation (2)
	Y = $138100 + 20% ($26183.67)
	Y = $138100 + $5236.73
	Y = $143336.73
		Service Departments		Operating Departments
		Information Technology	Administration	Education	Program Management	Total
	Direct Cost	$5,000	$126,000	$100,000	$29,000	$260,000
	Indirect Costs based on labor hours	$5,100	$5,100	$10,200	$5,100	$25,500
	Indirect Costs based on head count	$1,750	$7,000	$7,000	$5,250	$21,000
	IT cost allocation	($26,184)	$5,237	$5,237	$15,710	$0
	Administration cost allocation	$14,333.67	($143,337)	$57,334.69	$71,668.37	$0
				$179,771	$126,729	$306,500
	Cost allocation to the mental health and housing program
		Mental Health	Housing Program	Total
a	Direct Method
	Education	$90,770	$90,770	$181,540
	Program Management	$41,653	$83,307	$124,960
b	Step Method (IT goes first)
	Education	$91,001	$91,001	$182,001
	Program Management	$41,500	$82,999	$124,499
c	Reciprocal Method
	Education	$89,886	$89,886	$179,771
	Program Management	$42,243	$84,486	$126,729