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 $1,250,000 and $1,750,000, 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 $210,000, while the annual costs of the computer group are $600,000.

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

15%—service to market research

75%—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. (Round percentage calculations to 4 decimal places (e.g., 33.3333%), intermediate calculations and final answers to the nearest dollar amount.)

Market Reserach Financial Analysis Total Producing Department Cost

a.The direct method$0

b.The step method$0

c.The reciprocal method$0

Answer 1

ANSWER.

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 are treated as cost centers with budgeted annual costs of $1,250,000 and $1,750,000, 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 a budgeted annual costs of $210,000, while the annual cost of the computer group is $600,000.

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:

Percentage of estimated dollars of work and time by CFL:
	10%	service to the computer group
	15%	service to market research
	75%	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
Answer
Direct Method
		CFL Group	Computer	Mkt Research	Finan Analysis		Total
DEPARTMENTAL ALLOCATION BASES
CFL Group
	percent	0%	10.00%	15.00%	75.00%		100.00%
Computer
	percent	20.00%	0.00%	40.00%	40.00%		100.00%
FIRST PHASE: Trace Direct Costs and Perform Initial Allocation of Indirect Costs
Totals for All Departments	$ 210,000	$ 600,000	$ 1,250,000	$ 1,750,000		$ 3,810,000
SECOND PHASE: Reallocate Service Department Costs to Production Departments:
The Direct Method
CFL Group	Service % to producing departments		15.00%	75.00%
	Allocation % per the direct method		16.7%	83.3%
	Allocation amount	$ (210,000)		$ 35,000	$ 175,000
Computer	Service % to producing departments		40.00%	40.00%
	Allocation % per the direct method		50.0000%	50.0000%
	Allocation amount		$ (600,000)	300,000	300,000
Totals for Production Departments			$ 1,585,000	$ 2,225,000		$ 3,810,000
Step Method
		Support Departments	Producing Departments
		CFL Group	Computer	Mkt Resrch	Finan Analysis		Total
DEPARTMENTAL ALLOCATION BASES
CFL Group			-	-	-
	percent		10.00%	15.00%	75.00%		100%
Computer		-	-	-	-		-
	percent	20.00%	0.00%	40.00%	40.00%		100%
FIRST PHASE: Trace Direct Costs and Perform Initial Allocation of Indirect Costs
Totals for All Departments	$210,000	$600,000	$1,250,000	$1,750,000		$3,810,000
SECOND PHASE: Reallocate Service Department Costs to Production Departments:
The Step Method
First Step
Design	Service %		10.00%	15.00%	75.00%
	Amount	(210,000)	$21,000	$31,500	$157,500
Second Step
Programming	Service %			40.00%	40.00%
	Allocation percent per service share %		50.0000%	50.0000%
	Amount		($621,000)	310,500	310,500
Totals for	Production Departments		$1,592,000	$2,218,000		$3,810,000
Reciprocal Method Using Solver
		Support Departments	Producing Departments
		CFL Group	Computer	Mkt Resear	Finan Analysis		Total
DEPARTMENTAL ALLOCATION BASES
CFL Group
	percent	0%	10%	15%	75%		100.00%
Computer
	percent	20%	0%	40%	40%		100.00%
Totals for All Departments	$210,000	$600,000	$1,250,000	$1,750,000		$3,810,000
SECOND PHASE: Reallocate Service Department Costs to Production Departments:
First: Solve the simultaneous equations for Service 1 and Service 2:
Amount Allocated from Info Systems		336,734.69
Amount Allocated from Facilities		633,673.47
Second: Allocate to Producing Departments:
CFL Group	Service %			15%	75%	0%
	Alloc. Amt		($336,735)	$50,510	$252,551
Computer	Service %			40%	40%	0%
	Alloc. Amt		($633,673)	$253,469	$253,469
Totals for Production Departments			$1,553,980	$2,256,020		$3,810,000
	Reciprocal Cost Allocation Using Solver
Service	Allocated	Service Rates To..	Initial Allocation To…
Department	Cost	CFL Group	Computer	CFL Group	Computer
CFL Group	336,734.69	1.00	(0.10)	336,735	(33,673)
Computer	$633,673.47	(0.20)	1.00	(126,735)	633,673
				210,000	600,000
Equations to solve (using Solver):
CFL = $210,000 + (0.2 x Computer)
Computer = $600,000 + (0.1 x CFL)
Solution: CFL = $336,734.69; Computer = $663,673.47