Question

Part A. Wollongong Credit Centre (WCC) provides loan to two types of clients; individuals and corporate client. WCC has two support departments: IT Support (IT) and Admin Support (Admin) department. In addition, WCC has two operation departments to deal with its two distinct clients named Individual clients and corporate clients department. For the next quarter, the following cost record including budgeted cost of support department to be allocated to operating department is as follows: Support Department Operation Department IT Admin Individual Corporate Total Budgeted costs $ 1,200,000 1,500,000 7,500,000 8,000,000 18,200,000 Support work supplied by IT 25% 40% 35% 100% Support work supplied by Admin 10% 30% 60% 100% Required (show your workings):

(a) Using the direct method, determine the amount of support department costs will be allocated to the two operation departments

(b) Using the step-down method, determine the amount of support department costs will be allocated to the two operation departments if the Admin department with the highest amount is allocated first.

(c) Compare and explain differences in the support-department allocated to each operation department.

Answer 1

Direct method		Support departments		Operations departments
		IT	Admin	Individual clients	Corporate clients	Total
Budgeted costs		1200000	1500000	7500000	8000000	18200000
IT apportionment			25%	40%	35%
Admin apportionment		10%		30%	60%
IT costs apportionment	Ind: 40/75*1200000 Corp: 35/75*1200000	-1200000		640000	560000	0
Admin costs apportionment	Ind: 3/9*1500000 Corp: 6/9*1500000		-1500000	500000	1000000	0
		0	0	8640000	9560000	18200000

Step-down method		Support departments		Operations departments
		IT	Admin	Individual clients	Corporate clients	Total
Budgeted costs		1200000	1500000	7500000	8000000	18200000
IT apportionment			25%	40%	35%
Admin apportionment		10%		30%	60%
IT costs apportionment	Admin: 25% of 1200000 Ind: 40% of 1200000 Corp: 35% of 1200000	-1200000	300000	480000	420000	0
Admin costs apportionment	Ind: 3/9*180000 Corp: 6/9*180000		-1800000	600000	1200000	0
		0	0	8580000	9620000	18200000

Under direct method, IT costs and admin costs are directly allocated to operations departments. Under step-down method, the first support department, IT costs are allocated to all departments including admin department. Later, the total costs of Admin department are allocated to operations departments. Because the ratios differ, the costs under step-down method have increased, compared to direct method.