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In: Finance

Looking to compare, thanks. A) Allocate the two support departments' costs to the two operating departments...

Looking to compare, thanks.

A) Allocate the two support departments' costs to the two operating departments using the following methods?

Direct Method
Step-down method (Allocate AS first)
Step -down method (Allocate IS first)

B) Compare and Explain differences in the support department costs allocated to each operating department?

C) What approaches might be used to decide the sequence in which to allocate support departments when using the step-down method?

Support Operating
AS IS GOVT CORP Total
Budgeted Overhead Costs Before any
interdepartment cost allocations 600000 2400000 8756000 12452000 24208000
Support work supplied by AS
(budgeted head count) 0 0.25 0.4 0.35 100%
Support work supplied by IS
(budgeted computer time) 0.1 0 0.3 0.6 100

Solutions

Expert Solution

Direct method

AS

IS

Govt.

Corp

Cost

$   6,00,000

$   24,00,000

Allocation of AS Cost

(0.4/0.75, 0.35/0.75)

$ -6,00,000

$   3,20,000

$   2,80,000

Allocation of IS Cost

(0.3/0.9, 0.6/0.9)

$ -24,00,000

$   8,00,000

$ 16,00,000

Allocated cost direct method

$                -  

$                  -  

$ 11,20,000

$ 18,80,000

Step down AS first

AS

IS

Govt.

Corp

Cost

$   6,00,000

$   24,00,000

Allocation of AS Cost

(0.25,0.4,0.35)

$ -6,00,000

$     1,50,000

$   2,40,000

$   2,10,000

Allocation of IS Cost

(0.3/0.9, 0.6/0.9)

$ -25,50,000

$   8,50,000

$ 17,00,000

Allocated cost

$                -  

$                  -  

$ 10,90,000

$ 19,10,000

Step down IS first

AS

IS

Govt.

Corp

Cost

$   6,00,000

$   24,00,000

Allocation of IS Cost

(0.1,0.3,0.6)

$   2,40,000

$ -24,00,000

$   7,20,000

$ 14,40,000

Allocation of AS Cost

(0.4/0.75, 0.35/0.75)

$ -8,40,000

$   4,48,000

$   3,92,000

Allocated cost

$                -  

$                  -  

$ 11,68,000

$ 18,32,000

2) Comparison of allocate cost under three methods

               

AS

IS

Govt.

Corp

Allocated cost direct method

$           -  

$           -  

$ 11,20,000

$ 18,80,000

Allocated cost AS first

$           -  

$           -  

$ 10,90,000

$ 19,10,000

Allocated cost IS First

$           -  

$           -  

$ 11,68,000

$ 18,32,000

Under direct any allocation of cost to other service department is completely ignored. Whereas stepdown method recognizes the cost partially as allocation of one service department cost will have to be considered first and therefore there will be difference in allocation of cost to another department. As in above case when AS is considered first then allocation to Govt. is less as compared to direct and other step-down method.

3) The approaches that can be used to decide the sequence can be

a) On the basis of ranking of total allocable cost of departments.

b) On the basis of ranking of percentage of allocation to other service department.

c) On the basis of ranking of total allocable cost to other service departments.

jeff jeffy answered 1 year ago
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