Question

E-books, an online book retailer, has two operating departments—corporate sales and consumer sales—and two support departments—human resources and information systems. Each sales department conducts merchandising and marketing operations independently. E-books uses number of employees to allocate human resources costs and processing time to allocate information systems costs. The following data are available for September 2017:

	Support Departments		Operating Departments
	Human Resources	Information Systems	Corporate Sales	Consumer Sales
Budgeted costs for each department	$72,700	$234,400	$998,270	$489,860
Budgeted Number of Employees		21	42	28
Budgeted Information Processing time (in minutes)	320		1,920	1,600

The company allocates the Human Resources Department cost using the budgeted number of employees in each department. The costs of Information systems department are allocated to other departments using the number of minutes of information processing time for those departments.

a) Allocate the costs of the support departments to the operating departments using the reciprocal cost allocation method

Answer 1

(a):

	Human Resource			Information Systems
	No. of employees	% of total		Processing Time	% of total
HR				320.00	8.33%
Information Systems	21.00	23.08%
Corporate sales	42.00	46.15%		1,920.00	50.00%
Consumer sales	28.00	30.77%		1,600.00	41.67%
Total	91.00	100.00%		3,840.00	100.00%

Now total HR cost = HR department cost + cost allocated from Information systems (IS) and Total IS cost = IS department cost + cost allocated from HR department

Thus total IS = 234,400 + 23.08% of total HR department cost.

or total IS = 234,400 + 23.08% of (HR department cost + cost allocated from Information systems)

= 234,400 + 23.08% of (72700+(8.33% of total IS costs)

Let total IS costs be "x". Thus x = 234,400+23.08% of (72700+8.33x)

or x = 256,101.96. This can be rounded to 256,102.

Total HR department cost = 72700 + (256,102*8.33%) = 94,041.83. This can be rounded to 94,042

Allocation:

	HR	IS	Corporate sales	Consumer sales
Costs	72,700.00	234,400.00	998,270.00	489,860.00
HR costs allocated	-                        94,041.83	21,701.96	43,403.92	28,935.95
		(23.08% of 94041.83)	(46.15% of 94041.83)	(30.77% of 94041.83)
IS cost allocated	21,341.83	-                    256,101.96	128,050.98	106,709.15
	(8.33% of 256101.96)		(50% of 256101.96)	(41.67% of 256101.96)
Total costs	0	0.00	1,169,724.90	625,505.10