Question

Data Performance, a computer software consulting company, has three major functional areas: computer programming, information systems consulting, and software training. Carol Bingham, a pricing analyst, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Carol is considering three different methods of the departmental allocation approach to allocate overhead costs: the direct method, the step method, and the reciprocal method. She assembled the following data from the two service departments, information systems and facilities:

	Service Departments			Production Departments
	Information Systems	Facilities	Computer Programming	Information Systems Consulting	Software Training	Total
Budgeted overhead (base)	$80,000	$40,000	$160,000	$190,000	$125,000	$595,000
Information Systems (computer hours)		600	1,200	300	900	3,000
Facilities (square feet)	240		960	600	600	2,400

Required:

1. Using computer usage time as the allocation base for the information systems department and square feet of floor space as the application base for the facilities department, apply overhead from these service departments to the production departments and determine the total cost of each production department using these three methods:

a. Direct method.

b. Step method (both for the information systems department going first and for the facilities department going first).

c. Reciprocal method.

(Round percentage calculations to 4 decimal places (e.g., 33.3333%). For all requirements, Do not round your intermediate calculations. Round your final answers to nearest whole dollar amount.)

Answer 1

calculation of total cost of each production department using following methods :

a) direct method :

particular	information systems	fscilities	computer programming	information system consulting	software training	total
budgeted overhead	$80000	$40000	$160000	$190000	$125000	$595000
allocation :
information system (computer hours)	-$80000	0	40000 (80000 x 50%)	10000 (80000 x 12.5%)	30000 (80000 x 37.5%)	$80000
facilities (square feet)	0	-$40000	$17778 (40000 x 44.4444%)	$11111 (40000 x 27.7777%)	$11111 (40000 x 27.7777%)	40000
total overhead costs	0	0	$217778	$211111	$166111	$595000

calculation of % of base allocation to production department :

information system

total hours used = 1200 + 300+ 900 = 2400

computer programming = 1200 x 100/2400 = 50%

information system consulting = 300 x 100/2400 = 12.5%

software traimning = 900 x 100/2400 = 37.5%

facilities

total space used = 960 + 600+ 600 = 2160

computer programming = 960 x 100/2160 = 44.4444%

information system consulting = 600 x 100/2160 = 27.7777%

software traimning = 600 x 100/2160 = 27.7777%

b) step method :

information system department going first

particular	information systems	fscilities	computer programming	information system consulting	software training	total
budgeted overhead	$80000	$40000	$160000	$190000	$125000	$595000
allocation :
information system (computer hours)	-$80000	$16000 ($80000 x 20%)	$32000 ($80000 x 40%)	$8000 ($80000 x 10%)	$24000 ($80000 x 30%)	$80000
facilities (square feet)	0	-$56000	$24888 ($56000 x 44.4444%)	$15556 ($56000 x 27.7777%)	$15556 ($56000 x 27.7777%)	$56000
total overhead costs	0	0	$216888	$213556	$164556	$595000

calculation of % of base allocation to production department :

information system

total hours used = 600 + 1200 + 300+ 900 = 3000

facilities = 600 x 100/3000 = 20%

computer programming = 1200 x 100/3000 = 40%

information system consulting = 300 x 100/3000 = 10%

software traimning = 900 x 100/3000 = 30%

facilities

total cost after allocation of information sytem overhead = $40000 + $16000 = $56000

total space used = 960 + 600+ 600 = 2160

computer programming = 960 x 100/2160 = 44.4444%

information system consulting = 600 x 100/2160 = 27.7777%

software traimning = 600 x 100/2160 = 27.7777%

facilities department going first

particular	information systems	fscilities	computer programming	information system consulting	software training	total
budgeted overhead	$80000	$40000	$160000	$190000	$125000	$595000
allocation :
facilities (square feet)	$4000 ($40000 x 10%)	-$40000	$16000 ($40000 x 40%)	$10000 ($40000 x 25%)	$10000 ($40000 x 25%)	$40000
information system (computer hours)	-$84000	0	$42000 ($84000 x 50%)	$10500 ($84000 x 12.5%)	$31500 ($84000 x 37.5%)	$84000
total overhead costs	0	0	$218000	$210500	$166500	$595000

calculation of % of base allocation to production department :

facilities

total space used = 240 + 960 + 600+ 600 = 2400

information system = 240 x 100/2400 = 10%

computer programming = 960 x 100/2400 = 40%

information system consulting = 600 x 100/2400 = 25%

software traimning = 600 x 100/2400 = 25%

information system

total cost after allocation of facilities overhead = $80000 + $4000 = $84000

total hours used = 1200 + 300+ 900 = 2400

computer programming = 1200 x 100/2400 = 50%

information system consulting = 300 x 100/2400 = 12.5%

software traimning = 900 x 100/2400 = 37.5%

c) reciprocal method :

information system facilities

particular	computer hours	% of hour	square feet	% of area
information system			240	10
facilities	600	20
computer programming	1200	40	960	40
information system consulting	300	10	600	25
software training	900	30	600	25
totals	3000	100	2400	100

total information system costs = $80000 + 10% of total facilities costs

total facilities costs = $40000+ 20% of total information system costs

let us assume total facilities cost X

total information systems costs = $80000 + 10% of total facilities costs = $80000 + 10% of X = $80000 + 0.10 X

total facilities costs = $40000 + 20% of total information system costs = $40000 + 20% ($80000 + 0.10 X)

X = $40000 + $16000 + 0.02 X

X - 0.02 X = $56000

X = $56000/0.98 = $57142.86

total facilities costs = $57142.86

cost per hour = $57142.86/3000 = $19.05

total information system costs = $80000 + 10% of total facilities costs = $80000 + 10% of $57142.86

total information system costs = $80000 + $5714.286 = $85714.286 or $85714.29

cost per feet = $85714.29/2400 = $35.71

particular	information system	facilities	total cost (A + B)
	space used	cost per feet	total cost (A)	hourused	cost per hour	total cost(B)
computer programming	960	$35.71	34281.6	1200	$19.05	22860	57141.6
information system consulting	600	$35.71	21426	300	$19.05	5715	27141
software training	600	$35.71	21426	900	$19.05	17145	38571
			77133.6			45720	122853.6