Question

0. Case #3

BlueDot Company budgeted the following manufacturing overhead costs for the 2020 fiscal year.

Accounting & finance (support department) Human resources (support department) Industrial design (operating department) Production (operating department)

$500,000 $110,000 $315,000 $175,000

Budgeted services provided by the Accounting & Finance department:

Human resources 20% Industrial design 30% Production 50%

Budgeted services provided by the Human Resources department:

Accounting & finance 15% Industrial design 65% Production 20%

Required:

1. (A) Using the information provided above, allocate costs from the supporting departments

   to the operating departments using the Direct Method.

2. (B) Ignoring your calculations in (A), use the information provided above to allocate costs

   from the supporting departments to the operating departments using the Step Down

   method with the Accounting & Finance department allocating first.

3. (C) Ignoring your calculations in (A) and (B), use the information provided above to

   allocate costs from the supporting departments to the operating departments using the

   Step Down method with the Human Resources department allocating first.

4. (D) Ignoring your calculations in (A) to (C), use the information provided above to allocate

   costs from the supporting departments to the operating departments using the Reciprocal Method using either linear equations or repeated iterations.

Answer 1

A

Direct Method
Item	Operating Dept	Service Departments
Industrial design	Production	Accounts & finance	Human resource
Total Cost	$3,15,000.00	$1,75,000.00	$5,00,000.00	$1,10,000.00
Allocation of Accounts & Finance	$1,87,500.00	$3,12,500.00	-$5,00,000.00
	(500000 x 30/80)	(500000 x 50/80)
Allocation of Human resouce	$84,117.65	$25,882.35		-$1,10,000.00
	(110000 x 65/85)	(110000 x 20/85)
Total	$5,86,617.65	$5,13,382.35	$0.00	$0.00

B

Step Down Method - Allocating Accounts & Finance First
Item	Operating Dept	Service Departments
Industrial design	Production	Accounts & finance	Human resource
Total Cost	$3,15,000.00	$1,75,000.00	$5,00,000.00	$1,10,000.00
Allocation of Accounts & Finance	$1,50,000.00	$2,50,000.00	-$5,00,000.00	$1,00,000.00
	(500000 x 30/100)	(500000 x 50/100)		(500000 x 20/100)
Allocation of Human resouce	$1,60,588.24	$49,411.76		-$2,10,000.00
	(210000 x 65/85)	(210000 x 20/85)
Total	$6,25,588.24	$4,74,411.76	$0.00	$0.00

C

Step Down Method - Allocating Human Resource First
Item	Operating Dept	Service Departments
Industrial design	Production	Accounts & finance	Human resource
Total Cost	$3,15,000.00	$1,75,000.00	$5,00,000.00	$1,10,000.00
Allocation of Human resouce	$71,500.00	$22,000.00	$16,500.00	-$1,10,000.00
	(110000 x 65/100)	(110000 x 20/100)	(110000 x 15/100)
Allocation of Accounts & Finance	$1,93,687.50	$3,22,812.50	-$5,16,500.00
	(516500 x 30/80)	(516500 x 50/80)
Total	$5,80,187.50	$5,19,812.50	$0.00	$0.00

D

Let Accounts and department cost be X
Let Human Resource department cost be Y
X = 500000 + 0.15 Y
Y = 110000 + 0.20 X
Substitite Y in X
X = 500000 + 0.15(110000 + 0.20 X)
X = 500000 + 16500 + 0.03X
X - 0.03 X = 516500
0.97 X = 516500
X = 516500 /.97	532474.2268
Y = 110000 + 0.20 x 532474.2268	216494.8454
Reciprocal Method
Item	Operating Dept	Service Departments
Industrial design	Production	Accounts & finance	Human resource
Total Cost	$3,15,000.00	$1,75,000.00	$5,00,000.00	$1,10,000.00
Allocation of Accounts & Finance	$1,59,742.27	$2,66,237.11	-$5,32,474.23	$1,06,494.85
	(532474.23 x 30/100)	(532474.23 x 50/100)		(532474.23 x 20/100)
Allocation of Human resouce	$1,40,721.65	$43,298.97	$32,474.23	-$2,16,494.85
	(216494.85 x 65/100)	(216494.85 x 20/100)	(216494.85 x 15/100)
Total	$6,15,463.92	$4,84,536.08	$0.00	$0.00