Question

Support Department Cost Allocation—Reciprocal Services Method

Blue Africa Inc. produces laptops and desktop computers. The company’s production activities mainly occur in what the company calls its Laser and Forming departments. The Cafeteria and Security departments support the company’s production activities and allocate costs based on the number of employees and square feet, respectively. The total cost of the Security Department is $252,000. The total cost of the Cafeteria Department is $487,000. The number of employees and the square footage in each department are as follows:

	Employees		Square Feet
Security Department	10		570
Cafeteria Department	20		2,400
Laser Department	40		2,400
Forming Department	50		3,200

Using the reciprocal services method of support department cost allocation, determine the total costs from the Security Department that should be allocated to the Cafeteria Department and to each of the production departments.

	Cafeteria Department		Laser Department		Forming Department
Security Department cost allocation	$		$		$

Feedback

The reciprocal services method considers all inter-support-department services, and thus is the most accurate of the three support department allocation methods. The proportional usage of each support department's cost driver by the other departments to which its costs are to be allocated must be determined. Then, the support department costs are allocated simultaneously among the departments.

Answer 1

Departments	Cafeteria	Security
Security	10	10%	-	-
Cafeteria	-	-	2,400	30%
Laser	40	40%	2,400	30%
Forming	50	50%	3,200	40%
	100	100%	8,000	100%

Total Cafeteria Cost (CC) = Cafeteria Dept Cost + Cost allocated to Cafeteria from Security Department

Total Security Cost (SC)= Security Dept Cost + Cost allocated to Security from Cafeteria Department

Total Cafeteria Cost = Cafeteria Dept Cost + 30% of SC

Total Cafeteria Cost = $487,000 + 30% of SC

Total Security Cost = Security Dept Cost + 10% of CC

Total Security Cost = $252,000 + 10% of CC

CC = $487,000 + 30% of SC

CC=$487,000 + 30% * ($252,000 + 10% of CC)

CC = $487,000 + $ 75,600 + 0.03 CC

0.97CC = 562,600

CC = $ 580,000

Total Security Cost = $252,000 + 10% of CC = 252,000 + 10% * 580,000 = $310,000

Departments	Cafeteria Dept Cost	Security Dept Cost
Security	58,000	10%	(3,10,000)	-
Cafeteria	(5,80,000)	-	93,000	30%
Laser	2,32,000	40%	93,000	30%
Forming	2,90,000	50%	1,24,000	40%
	-	100%	-	100%