Question

Question: SPRINT , Inc., manufactures athletic shoes and athletic clothing for both amateur and professional athletes. The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows total costs for each manufacturing facility and for each support department.

Total Costs by Department (in thousands)

Information technology (IT) $ 2,000

Human resources (HR) 1,000

Clothing $10,000

Shoes $8,000

Total costs $24,000

The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) based on the following Data and bases, as below:

Information technology: Number of IT labor hours worked by department

Human resources: Number of employees supported by department

Department IT Hours Used Number of Employees

Clothing 5,000 120

Shoes 3,000 40

Information technology - 40

Human resources 2,000 -

Required

1. Allocate the cost of the support department (of information technology and human resources) to the operating department (clothing and shoes using (a) the direct method, (b) the step-down method (allocate information technology first), (c) the reciprocal method?

2. Assume that all of the work of the IT department could be outsourced to an independent company for $97.50 per hour. If Spirit Training no longer operated its own IT department, 30% of the costs of the IT department could be eliminated. Should Spirit outsource its IT services?

Answer 1

Sollution 1(a)
Cost Allocation - Direct method(Figure in Thousands)
Particulars	HR	IT	Clothing	Shoes
Department Cost	$1,000.00	$2,000.00	$10,000.00	$8,000.00
Allocation of support department cost:
HR (120:40)	-$1,000.00		$750.00	$250.00
IT (5000:3000)		-$2,000.00	$1,250.00	$750.00
Total	$0.00	$0.00	$12,000.00	$9,000.00
Sollution 1(b)
Cost Allocation - Step down method (First IT Allocation)(Figure in Thousands)
Particulars	HR	IT	Clothing	Shoes
Department Cost	$1,000.00	$2,000.00	$10,000.00	$8,000.00
Allocation of support department cost:
IT (2000:5000:3000)	$400.00	-$2,000.00	$1,000.00	$600.00
HR (120:40)	-$1,400.00		$1,050.00	$350.00
Total	$0.00	$0.00	$12,050.00	$8,950.00
Cost Allocation - Step down method (First HR Allocation)(Figure in Thousands)
Particulars	HR	IT	Clothing	Shoes
Department Cost	$1,000.00	$2,000.00	$10,000.00	$8,000.00
Allocation of support department cost:
HR (40:120:40)	-$1,000.00	$200.00	$600.00	$200.00
IT (5000:3000)		-$2,200.00	$1,375.00	$825.00
Total	$0.00	$0.00	$11,975.00	$9,025.00
Sollution 1c
Cost Allocation - Reciprocal method (Figure in Thousands)
Particulars	HR	IT	Clothing	Shoes
Department Cost	$1,000.00	$2,000.00	$10,000.00	$8,000.00
Allocation of support department cost:
HR (40:120:40)	-$1,458.33	$291.67	$875.00	$291.67
IT (2000:5000:3000)	$458.33	-$2,291.67	$1,145.84	$687.50
Total	$0.00	$0.00	$12,020.83	$8,979.17
Calculation of Respective department cost
Let Total HR cost=X , Total IT cost =Y
X =HR Department cost+cost allocated to HR from IT.
Y =IT Department cost+cost allocated to IT from HR.
Total cost of HR Department	Total cost of IT Department
X=HR COST+20%(2000+.20X)	Y=IT COST+20%(1000+.20Y)
X =1000+{(2000)*20%+(X*20%)}	Y=2000+20%(1000+Y)
1000+400=.80X	Y=2000+{(20%*1000)+(20%*Y)}
X=1400/.96	Y=2000+200+.20Y
$1,458.33	Y=2200/.96
	2291.67
Sollution 2
Spirit Should not outsource its IT services because outsource its IT services result in loss $375000
IT Department hours	10000 Hrs
Current cost of it department	2000000
cost to be eliminated	600000
Unavoidable cost	1400000
Cost of outsourcing	975000
Total cost	2375000
Cost saving/loss	-375000