Question

Barfield Corporation prepares business plans and marketing analyses for startup companies in the Cleveland area. Barfield has been very successful in recent years in providing effective service to a growing number of clients. The company provides its service from a single office building in Cleveland and is organized into two main client-service groups: one for market research and the other for financial analysis. The two groups have budgeted annual costs of $440,000 and $770,000, respectively. In addition, Barfield has a support staff that is organized into two main functions: one for clerical, facilities, and logistical support (called the CFL group) and another for computer-related support. The CFL group has budgeted annual costs of $432,000, while the annual costs of the computer group are $717,000.

Tom Brady, CFO of Barfield, plans to prepare a departmental cost allocation for his four groups, and he assembles the following information.

Percentage of estimated dollars of work and time by CFL group:

10%—service to the computer group

20%—service to market research

70%—service to financial analysis

Percentage of estimated dollars of work and time by the computer group:

20%—service to the CFL group

40%—service to market research

40%—service to financial analysis

Required:
Determine the total cost in the financial analysis and market research groups, after departmental allocation, using (a) the direct method, (b) the step method when the sourcing department that provides the greatest percentage of services to other service departments goes first, and (c) the reciprocal method.

Answer 1

A) Direct method

Particulars	Market research	Financial analysis
Cost	440000	770000
Allocation
1) CFL group in (20:70)	96000 (432000*20/90)	336000 (432000*70/90)
2) Computer group (40:40)	358500	358500
Total	894500	1464500

B) Step method

in this method first we will allocate that dept cost which has highest % serviceto others.In this case that dept is computer which provides 20% service to CFL Group

Allocation of Computer group cost - 717000 (20:40:40)

CFL group = 717000*20% = 143400

Market research = 717000*40% = 286800

Financial analysis = 717000*40% = 286800

Allocation of CFL

new cfl cost = 432000 + 143400 = 575400

allocation:-

Mkt research = 575400*20/90 = 127867

Finance = 585400*70/90 = 447533

Particulars	Market research	Financial analysis
Cost	440000	770000
Allocation
1) CFL group in (20:70)	127867	447533
2) Computer group (40:40)	286800	286800
Total	854667	1504333

Particulars	Market research	Financial analysis
Cost	440000	770000
Allocation
1) CFL group in (20:70)	96000 (432000*20/90)	336000 (432000*70/90)
2) Computer group (40:40)	358500	358500
Total	894500	1464500

C) Reciprocal method

Assume after allocation

cost of CFL group = X

Cost of computer group = Y

Hence

X = 432000 + (Y*20%)

Y = 717000 + ( X*10%)

By putting equation 1 into equation 2

Y = 717000 + [(432000+0.20Y)*0.10]

= 717000 + 43200 + 0.02Y

Y - 0.02Y = 760200

Y = 760200 / 0.98 = 775714 (Computer group)

X = 432000 + (775714*20%) = 587143 (CFL group)

Particulars	Market research	Financial analysis
Cost	440000	770000
Allocation
1) CFL group in (20:70)	117429 (587143*20/100)	411000 (587143*70/100)
2) Computer group (40:40)	310286 (775714*40%)	310285 (775714*40%)
Total	867715	1491285