Question

Austin Partners provides management consulting services to government and corporate clients.

Austin has two support departments —administrative services​ (AS) and information systems (IS)—and

two operating departments—government consulting​ (GOVT) and corporate consulting​ (CORP). For the first quarter of 2013​, Austin's cost records indicate the​ following:

	SUPPORT			OPERATING
	AS	IS		GOVT	CORP	Total
Budgeted overhead costs before any
interdepartment cost allocations	$690,000	$1,800,000		$7,325,000	$12,550,000	$22,365,000
Support work supplied by AS
(budgeted head count)	---	20%		52%	28%	100%
Support work supplied by IS
(budgeted computer time)	10%	---		36%	54%	100%

1.	Allocate the two support​ departments' costs to the two operating departments using the following​ methods:
	a. Direct method b. ​Step-down method​ (Allocate AS​ first) c. ​Step-down method​ (Allocate IS​ first)
2.	Compare and explain differences in the​ support-department costs allocated to each operating department.
3.	What approaches might be used to decide the sequence in which to allocate support departments when using the​ step-down method?

Answer 1

1
			AS	IS		Govt	Corp	Total
a.	Direct method:
	Costs		690000	1800000
	AS cost allocation
	(52/80,28/80)		-690000			448500	241500	690000
	IS cost allocation
	(36/90,54/90)			-1800000		720000	1080000	1800000
			0	0		1168500	1321500	2490000
b.	Step-Down method (Allocate AS First)
	Costs		690000	1800000
	AS cost allocation
	(20/100,52/100,28/100)		-690000	138000		358800	193200	690000
	IS cost allocation
	(36/90,54/90)			-1938000		775200	1162800	1938000
			0	0		1134000	1356000	2628000
c.	Step-Down method (Allocate IS First)
	Costs		690000	1800000
	IS cost allocation
	(10/100,36/100,54/100)		180000	-1800000		648000	972000	1800000
	AS cost allocation
	(52/80,28/80)		-870000	0		565500	304500	870000
			0	0		1213500	1276500	2670000
2	Cost allocated to					Govt	Corp
	Direct method:					1168500	1321500
	Step-Down method (Allocate AS First)					1134000	1356000
	Step-Down method (Allocate IS First)					1213500	1276500
	For Govt,Higher cost is under step down method (Allocate IS first).Lower cost under step down method (Allocate AS first)
	For Corp,Higher cost is under step down method (Allocate AS first).Lower cost under step down method (Allocate IS first)
	Direct method ignores Services provided to supporting departments
	Step-down method partially recognises services provided to supporting departments
3	Approaches to decide the sequence in which to allocate support departments when using the step-downmethod:
	a) On the basis of % of services provided to supporting departments
	Rank
	1	AS	25%
	2	IS	10%
	b) on the basis of $ value of services provided to supporting departments:
	Rank
	1	IS	180000	(1800000*0.10)
	2	AS	138000	(690000*0.20)
	c) On the basis of cost in support department:
	Rank
	1	IS	1800000
	2	AS	690000