Question

Amy’s Binders produces and sells both custom and ordinary binders. The company has four departments: Marketing, HR, Custom Binders, and Ordinary Binders. The Marketing and HR departments provide support services for each other as well as for the operating departments. The two operating departments run completely independently of each other. Amy uses the number of employees to allocate HR costs, and the total dollars spent to allocate Marketing costs. The following data is available for the year just ended: Support Departments Operating Departments Marketing HR Custom Ordinary Costs incurred before allocations 800,000 500,000 1,400,000 1,600,000 Total dollars spent - 120,000 650,000 730,000 Number of employees 15 - 310 675 REQUIRED: a) Assume that Amy allocates the costs of its support departments to the operating departments using the direct method. Calculate the total cost, including allocations, of each of the two operating departments. b) Disregard your answer to (a). Assume that Amy allocates the costs of its support departments to the operating departments using the step-down method based on the percentage of their services provided to other support departments. Calculate the total cost, including allocations, of each of the two operating departments. c) Disregard your answers to (a) and (b). Assume that Amy allocates the costs of its support departments to the operating departments using the reciprocal method. Calculate the total cost, including allocations, of each of the two operating departments.

Answer 1

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Amy Binders
Direct Method	Marketing	HR	Custom	Ordinary	Total
Total dollars spent			650,000.00	730,000.00	1,380,000.00
Total dollars spent %			47.101%	52.899%	100.00%
Number of Employees			106.00	75.00	181.00
Number of Employees %			58.56%	41.44%	100.00%
Total costs	800,000.00	500,000.00	1,400,000.00	1,600,000.00	4,300,000.00
Marketing cost to be allocated- Dollars spent %	(800,000.00)	-	376,811.59	423,188.41	-
HR cost to be allocated- Number of Employees %		(500,000.00)	292,817.68	207,182.32	-
Total cost after allocation	-	-	2,069,629.00	2,230,371.00	4,300,000.00
Sequential Method	Marketing	HR	Custom	Ordinary	Total
Total dollars spent		120,000.00	650,000.00	730,000.00	1,500,000.00
Total dollars spent %	0.00%	8.00%	43.33%	48.67%	100.00%
Number of Employees			106.00	75.00	181.00
Number of Employees %			58.56%	41.44%	100.00%
Total costs	800,000.00	500,000.00	1,400,000.00	1,600,000.00	4,300,000.00
Marketing cost to be allocated- Dollars spent %	(800,000.00)	64,000.00	346,666.67	389,333.33	-
Total	-	564,000.00	1,746,666.67	1,989,333.33	4,300,000.00
HR cost to be allocated- Number of Employees %	-	(564,000.00)	330,298.34	233,701.66	-
Total cost after allocation	-	-	2,076,965.00	2,223,035.00	4,300,000.00
Reciprocal Method	Marketing	HR	Custom	Ordinary	Total
Total dollars spent		120,000.00	650,000.00	730,000.00	1,500,000.00
Number of Employees	15.00		106.00	75.00	196.00
Total dollars spent %	0.00%	8.00%	43.33%	48.67%	100.00%
Number of Employees %	7.65%	0.00%	54.08%	38.27%	100.00%
Total costs	800,000.00	500,000.00	1,400,000.00	1,600,000.00	4,300,000.00

Let cost of Marketing is $ X and HR is $ Y

So, X= 800000+ 7.65% of Y

So, X= 800000+ 0.0765Y

Y= 500000+ 8% of X

Y= 500000+ 0.08X

Substituting the value of X in equation 2:

Y = 500000 + 0.08(800000 + 0.0765Y)

Y = 500000 + 64000+.006122Y

Y – 0.006122Y = 500000+64000

0.993878Y = 564,000

Y = 564,000/0.993878

Y = $ 567,474

Substituting the value of Y in equation 1:

So, X= 800000+ 0.0765Y

So, X= 800000+ 0.0765*567474

So, X= 800000+ 43429

X= $ 843,429

Allocation Summary	Marketing	HR	Custom	Ordinary	Total
Total dollars spent %	-	8.00%	43.33%	48.67%	100.00%
Number of Employees %	7.65%	-	54.08%	38.27%	100.00%
Department cost	800,000.00	500,000.00	1,400,000.00	1,600,000.00	4,300,000.00
Total costs
Marketing	(843,429.00)	67,474.00	365,486.00	410,469.00	-
HR	43,429.00	(567,474.00)	306,899.00	217,146.00	-
Cost after allocation	-	-	2,072,385.00	2,227,615.00	4,300,000.00