Question

The Fleming Foundation is a charitable organization founded by Gaylord Fleming and Sandy Fleming. The Flemings intended for the charity to provide programs in health care for the elderly, particularly those in poverty. The two main program divisions of the foundation are mental health for the elderly and housing for the elderly. In addition to these programs, the Foundation also provides health care educational programs and has a significant fund-raising effort to help the Foundation grow and accomplish the goals of the founders. The Foundation is organized into two operating departments—education and program management. These departments are supported by two service departments—information technology (IT) and administration. To summarize, there are four departments (two service departments and two operating departments) and two programs (mental health and housing for the elderly). The service department costs are allocated to the operating departments, and then the operating department costs are allocated to the programs.

There are $420,000 of costs directly traceable to each of the four departments. An additional $42,000 of indirect costs is shared among the four departments—$22,500 of which is allocated to the departments based on labor hours and $19,500 of which is allocated to the departments based on the number of personnel (head count) in the departments.

The cost, labor hours, and head count in these departments in the most recent year are as follows:

Departments	Direct Cost				Labor Hours				Head Count
Information technology	$	7,000				2,000				1
Administration		128,000				2,000				4
Education		118,000				4,000				4
Program management		167,000				2,000				3
	$	420,000

IT serves education, administration, and program management 20%, 20%, and 60% of its time, respectively. Administration serves education, IT, and program management 40%, 10%, and 50% of its time, respectively.

The costs of the two operating departments (education and program management) are allocated to the two programs (mental health and housing) as follows: the costs in Education are allocated on the basis of labor hours in the programs, while the costs in program management are allocated using the head count used in the two programs. The following table shows the labor hours and head count consumption by the two programs.

	Labor Hours				Head Count
Mental health		1,000				1
Housing		1,000				2
Labor hours in education		2,000
Head count in program management						3

Required:

Determine the costs allocated to the mental health and housing programs using the (a) direct method, (b) the step method (assuming that IT goes first), and (c) the reciprocal method.

Answer 1

Departments	Direct	Labor hours	Cost allocated based on labor hours (Labor hours *2.25)	Head count	Cost allocated based on head counts (Head count * 1625)	Total cost
Information technology	7,000	2,000	4500	1	1625	13,125
Administration	128,000	2,000	4500	4	6500	139,000
Education	118,000	4,000	9000	4	6500	133,500
Program management	167,000	2,000	4500	3	4875	176,375
Total	420,000	10,000	22500	12	19500	462,000
Cost allocated per labor hours (22500/10000)				2.25
Cost allocated based on head counts (19500/12)				1625

direct method
	Information technology	Administration	Education	Program management
Total departmental cost	13,125.00	139,000.00	133,500.00	176,375.00
Allocated IT cost In Proportion of 20:60 respectively (20+60=80) (For education = 13125 *20/80)	(13,125.00)		3,281.25	9,843.75
Allocated Administrative In Proportion of 40:50 respectively		(139,000.00)	61,777.78	77,222.22
total cost after departmental allocation using direct method	-	-	198,559.03	263,440.97
step method with First Allocation of IT
	Information technology	Administration	Education	Program management
Total departmental cost	13,125.00	139,000.00	133,500.00	176,375.00
Allocated IT cost In Proportion of 20:20:60 respectively (20+20+60=100) (For education = 13125 *20/100)	(13,125.00)	2,625.00	2,625.00	7,875.00
Total	-	141,625.00	136,125.00	184,250.00
Allocated 141625 Administrative In Proportion of 40:50 respectively		(141,625.00)	62,944.44	78,680.56
total cost after departmental allocation using step method	-	-	199,069.44	262,930.56
reciprocal method
	Information technology	Administration	Education	Program management
Total departmental cost	13,125.00	139,000.00	133,500.00	176,375.00
Allocated IT cost In Proportion of 20:20:60 respectively	(13,125.00)	2,625.00	2,625.00	7,875.00
Total	-	141,625.00	136,125.00	184,250.00
Allocated Administrative In Proportion of 10:40:50 respectively	14,162.50	(141,625.00)	56,650.00	70,812.50
Total	14,162.50	-	192,775.00	255,062.50
Allocated IT cost In Proportion of 20:20:60 respectively	(14,162.50)	2,832.50	2,832.50	8,497.50
Total	-	2,832.50	195,607.50	263,560.00
Allocated Administrative In Proportion of 10:40:50 respectively	283.25	(2,832.50)	1,133.00	1,416.25
Total	283.25	-	196,740.50	264,976.25
Allocated IT cost In Proportion of 20:20:60 respectively	(283.25)	56.65	56.65	169.95
Total	-	56.65	196,797.15	265,146.20
Allocated Administrative In Proportion of 10:40:50 respectively	5.67	(56.65)	22.66	28.33
Total	5.67	-	196,819.81	265,174.53
Allocated IT cost In Proportion of 20:20:60 respectively	(5.67)	1.13	1.13	3.40
Total	-	1.13	196,820.94	265,177.92
Allocated Administrative In Proportion of 10:40:50 respectively	0.11	(1.13)	0.45	0.57
Total	0.11	-	196,821.40	265,178.49
Allocated IT cost In Proportion of 20:20:60 respectively	(0.11)	0.02	0.02	0.07
Total	-	0.02	196,821.42	265,178.56
Allocated Administrative In Proportion of 10:40:50 respectively	0.00	(0.02)	0.01	0.01
total cost after departmental allocation using reciprocal method	0.00	-	196,821.43	265,178.57

Final answer
direct method
	Education	Program management	Mental health	Housing
Allocated cost	198,559.03	263,440.97
Allocated education cost 1000:1000 respectively to Mental health and housing	(198,559.03)		99,279.51	99,279.51
Allocated Program management cost 1:2 respectively to Mental health and housing		(263,440.97)	87,813.66	175,627.31
Total cost	-	-	187,093.17	274,906.83
step method with First Allocation of IT
	Education	Program management	Mental health	Housing
Allocated cost	199,069.44	262,930.56
Allocated education cost 1000:1000 respectively to Mental health and housing	(199,069.44)		99,534.72	99,534.72
Allocated Program management cost 1:2 respectively to Mental health and housing		(262,930.56)	87,643.52	175,287.04
Total cost	-	-	187,178.24	274,821.76
reciprocal method
	Education	Program management	Mental health	Housing
Allocated cost	196,821.43	265,178.57
Allocated education cost 1000:1000 respectively to Mental health and housing	(196,821.43)		98,410.71	98,410.71
Allocated Program management cost 1:2 respectively to Mental health and housing		(265,178.57)	88,392.86	176,785.71
Total cost	-	-	186,803.57	275,196.43