Question

Exercise 7-28 Departmental Cost Allocation [LO 7-3, 7-5]

HomeLife Life Insurance Company has two service departments (actuarial and premium rating) and two production departments (advertising and sales). The distribution of each service department’s efforts (in percentages) to the other departments is shown in the following table:

	To
From	Actuarial			Premium Rating			Advertising			Sales
Actuarial		—			80	%		10	%		10	%
Premium		20	%		—			20			60

The direct operating costs of the departments (including both variable and fixed costs) are:

Actuarial	$	89,000
Premium rating		24,000
Advertising		69,000
Sales		49,000

Required:

1. Determine the total costs of the advertising and sales departments after using the direct method or allocation.

2. Determine the total costs of the advertising and sales departments after using the step method of allocation.

3. Determine the total costs of the advertising and sales departments after using the reciprocal method of allocation.

Answer 1