Question

Computer Information Services is a computer software consulting company. Its three major functional areas are computer programming, information systems consulting, and software training. Carol Birch, a pricing analyst in the Accounting Department, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Birch is considering three different methods of allocating overhead costs-the direct method, the step method, and the reciprocal method. Birch assembled the following data on overhead from its two service departments, information systems and facilities:

Service Departments Production Departments

Info Systems Facilities Computer Programming Info Systems Consulting Software Training Total

Budgeted overhead (base) $90,000 $32,000 $170,000 $193,000 $134,000 $619,000

Information systems (computer hours) 1,000 500 1,000 2,500 5,000

Facilities (sqaure feet) 200 600 600 600 2,000

1. Use computer usage time as the allocation base for information systems department and square feet of floor space as the application base for facilities department, apply overhead for these service departments to the production departments, using these three methods:

a. Direct method

b. Step method (both for information systems department going first and for the facilities department going first).

c. Reciprocal method.

Answer 1

Solution 1a:

From	Service Department Cost Allocation - Direct Method
	Service Department		Production Departments
	Info System	Facilities	Computer programming	Info System Consulting	Software training
Direct charges of department	$90,000	$32,000	$170,000	$193,000	$134,000
Info System (500:1000:2500)	-$90,000		$11,250	$22,500	$56,250
Facilities (600:600:600)		-$32,000	$10,667	$10,667	$10,667
Total	$0	$0	$191,917	$226,167	$200,917

Solution 1b:

From	Service Department Cost Allocation - Step Method (Allocation of Info System First)
	Service Department		Production Departments
	Info System	Facilities	Computer programming	Info System Consulting	Software training
Direct charges of department	$90,000	$32,000	$170,000	$193,000	$134,000
Info System (1000:500:1000:2500)	-$90,000	$18,000	$9,000	$18,000	$45,000
Facilities (600:600:600)		-$50,000	$16,667	$16,667	$16,667
Total	$0	$0	$195,667	$227,667	$195,667

From	Service Department Cost Allocation - Step Method (Allocation of facilities First)
	Service Department		Production Departments
	Info System	Facilities	Computer programming	Info System Consulting	Software training
Direct charges of department	$90,000	$32,000	$170,000	$193,000	$134,000
Faciliites (200:600:600:600)	$3,200.00	-$32,000.00	$9,600.00	$9,600.00	$9,600.00
Info System (500:1000:2500)	-$93,200.00		$11,650.00	$23,300.00	$58,250.00
Total	$0.00	$0.00	$191,250.00	$225,900.00	$201,850.00

Solution 1c:

Service department cost = Direct Cost + Allocated Cost

Info system Department Cost = $90,000 + [200 / (200+600+600+600)]* Facilities department cost

= $90,000 + 0.10* Facilities department cost

Facilities Department Cost = $32,000 + [1000 / (1000+500+1000 + 2500)]* info system Cost

= $32,000 + 0.20* Info system Cost

Facilities Cost = $32,000 + 0.20 ($90,000 + 0.10*Facilities Cost)

Facilities Cost = $32,000 + $18,000 + 0.02*FacilitiesCost

Facilities Cost = $50,000 / 0.98 = $51,020

Info system Cost = $90,000 + 0.10*$51,020 = $95,102

From	Service Department Cost Allocation - Reciprocal Method
	Service Department		Production Departments
	Info System	Facilities	Computer programming	Info System Consulting	Software training
Direct charges of department	$90,000	$32,000	$170,000	$193,000	$134,000
Info System (1000:500:1000:2500)	-$95,102	$19,020	$9,510	$19,020	$47,551
Faciliites (200:600:600:600)	$5,102	-$51,020	$15,306	$15,306	$15,306
Total	$0	$0	$194,816	$227,326	$196,857