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In: Accounting

This problem illustrates how costs of two corporate support departments are allocated to operating divisions using...

This problem illustrates how costs of two corporate support departments are allocated to operating divisions using a dual-rate method. Fixed costs are allocated using budgeted costs and budgeted hours used by other departments. Variable costs are allocated using actual costs and actual hours used by other departments.

Seth Gross Horizons budgets the following amounts for its two central corporate support departments (legal and personnel) in supporting each other and the two manufacturing divisions, the Laptop Division (LTD) and the Work Station (WSD):

Legal Department

Personnel Department

LTD

WSD

Total

Budgeted Usage

Legal (hours)

-

250

1,500

750

2,500

Personnel (hours)

2,500

-

22,500

25,000

50,000

Actual Usage

Legal (hours)

-

400

400

1,200

2,000

Personnel (hours)

2,000

-

26,600

11,400

40,000

Budgeted fixed Overhead

$360,000

$475,000

-

-

$835,000

Actual variable Overhead

$200,000

$600,000

-

-

$800,000

Required:

1.     What amount of support-department costs for legal and personnel will be allocated to LTD and WSD using (a) the direct method, (b) the step-down method, and (c) the reciprocal method? Must be done in Excel.

2.     Comment on your results.

Solutions

Expert Solution

a) Direct method:
Legal
Department		 Personnel
Department		 LTD WSD Total
Fixed overhead 360000 475000
Legal (1500/2250,750/2250) -360000 240000 120000
Personnel (22500/47500,25000/47500) -475000 225000 250000
Cost allocated 0 0 465000 370000 835000
Variable overhead 200000 600000
Legal (400/1600,1200/1600) -200000 50000 150000
Personnel (26600/38000,11400/38000) -600000 420000 180000
Cost allocated 0 0 470000 330000 800000
b) Step down method:
Legal
Department		 Personnel
Department		 LTD WSD Total
Fixed overhead 360000 475000
Legal (250/2500,1500/2500,750/2500) -360000 36000 216000 108000
Personnel (22500/47500,25000/47500) -511000 242053 268947
Cost allocated 0 0 458053 376947 835000
Variable overhead 200000 600000
Legal (400/2000,400/2000,1200/2000) -200000 40000 40000 120000
Personnel (26600/38000,11400/38000) -640000 448000 192000
Cost allocated 0 0 488000 312000 800000
c) Reciprocal method:
Legal
Department		 Personnel
Department		 LTD WSD Total
Fixed overhead 360000 475000
Legal (250/2500,1500/2500,750/2500) -385678 38568 231407 115703
Personnel (2500/50000,22500/50000,25000/50000) 25678 -513568 231106 256784
Cost allocated 0 0 462512 372487 835000
Variable overhead 200000 600000
Legal (400/2000,400/2000,1200/2000) -232323 46465 46465 139394
Personnel (2000/40000,26600/40000,11400/40000) 32323 -646465 429899 184243
Cost allocated 0 0 476364 323636 800000
Notes:
Reciprocal method:
Let legal department cost be x
Let personnel department cost be y
Fixed overhead allocation:
x=360000+(2500/50000)*y
x=360000+0.05y……………… (1)
y=475000+(250/2500)*x
y=475000+0.10x………………(2)
Apply (2) in (1)
x=360000+0.05*(475000+0.10x)
x=385678
y=475000+0.10*385678=513568
Variable overhead allocation:
x=200000+(2000/40000)*y
x=200000+0.05y……………… (1)
y=600000+(400/2000)*x
y=600000+0.20x………………(2)
Apply (2) in (1)
x=200000+0.05*(600000+0.20x)
x=232323
y=600000+0.20*232323=646465
2 For LTD
Fixed Variable Total
Direct method 465000 470000 935000
Step-Down method 458053 488000 946053
Reciprocal method 462513 476364 938877
For WSD
Fixed Variable Total
Direct method 370000 330000 700000
Step-Down method 376947 312000 688947
Reciprocal method 372487 323636 696123
For LTD,Higher cost is under step down method.Lower cost under Direct method
For WSD,Higher cost is under Direct method.Lower cost under step down method

ekkarill92 answered 2 years ago
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