Question

Blue Africa Inc. produces laptops and desktop computers. The company’s production activities mainly occur in what the company calls its Laser and Forming departments. The Cafeteria and Security departments support the company’s production activities and allocate costs based on the number of employees and square feet, respectively. The total cost of the Security Department is $250,000. The total cost of the Cafeteria Department is $313,000. The number of employees and the square footage in each department are as follows:

	Employees		Square Feet
Security Department	10		600
Cafeteria Department	28		2,400
Laser Department	40		4,800
Forming Department	50		800

Using the reciprocal services method of support department cost allocation, determine the total costs from the Security Department that should be allocated to the Cafeteria Department and to each of the production departments.

	Cafeteria Department		Laser Department		Forming Department
Security Department cost allocation	$		$		$

Answer 1

Solution

Blue Africa

Determination of the total costs from the Security Department that should be allocated to the Cafeteria Department and to each of the production departments:

	Cafeteria Department	Laser Department	Forming Department
Security Department Cost Allocation	$87,000	$174,000	$29,000

Computations:

Allocation of the cost of the service department to the operating departments using the reciprocal method:

Note: Computation of allocation base excludes the specific department, the cost of which we are trying to allocate.

Basic equations –

Proportions –

Allocation basis: Cafeteria – Number of Employees; Security – Square Feet

Security –

For security, we ignore the usage of security (600 square feet).

Security to Laser = 4,800/8,000 = 60%

Security to Forming = 800/8,000 = 10%

Security to Cafeteria = 2,400/8,000 = 30%

Total Cafeteria Cost = $313,000 + 30% of Security

Cafeteria –

Cafeteria to Laser = 40/100 = 40%

Cafeteria to Forming = 50/100 = 50%

Cafeteria to Security = 10/100 = 10%

Total Security Cost = $250,000 + 10% of Cafeteria

Assuming Cafeteria Cost to be A and,

Assuming Security Cost to be B

A = 313,000 + 30% B

B = 250,000 + 10% A

Substituting the values,

A = 313,000 + 30% (250,000 + 10% of A)

A = 313,000 + 75,000 + 0.03A

0.97 A = $388,000

A = $400,000

Total Cafeteria Cost = $400,000

Substituting the value of A,

B = 250,000 + 10% x 400,000

B = 250,000 + 40,000 = $290,000

Allocation of Cafeteria cost to Security = 10% of 400,000 = $40,000

Total Security Cost = $290,000

Allocation of Security Cost to Cafeteria = 30% of 290,000 = $87,000

Allocation of Security cost to Laser = 60% x 290,000 = $174,000

Allocation of Security cost to Forming = 10% x 290,000 = $29,000