Problem 11-49 Comparison of Allocation Methods (LO 11-2, 3, 4) BluStar Company has two service departments,...

Problem 11-49 Comparison of Allocation Methods (LO 11-2, 3, 4) BluStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations follows: Administration Accounting Domestic International Employees – 29 48 23 Transactions 35,000 – 22,000 88,000 Department direct costs $ 353,000 $ 148,000 $ 945,000 $ 3,560,000 Required: a. Allocate the cost of the service departments to the operating departments using the direct method. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) c. Allocate the cost of the service departments to the operating departments using the reciprocal method. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

Solutions

Expert Solution

a) Allocation of cost of service departments using the direct method (Amounts in $)

Departments	Administration	Accounting	Domestic	International
Direct Costs	353,000	148,000	945,000	3,560,000
Administration allocation (in the ratio of 48:23 no. of employees)	(353,000)	-	238,648	114,352
Accounting allocation (in the ratio of 22,000:88,000 no. of transactions)	-	(148,000)	29,600	118,400
Total cost allocated	0	0	1,213,248	3,792,752

b) Allocation of cost of service departments using the step method (Amounts in $)

Departments	Administration	Accounting	Domestic	International
Direct Costs	353,000	148,000	945,000	3,560,000
Administration allocation (in the ratio of 29:48:23 no. of employees)	(353,000)	102,370	169,440	81,190
Accounting allocation (in the ratio of 22,000:88,000 no. of transactions)	-	(250,370)	50,074	200,296
Total cost allocated	0	0	1,164,514	3,841,486

c) Firstly we need to set up equations

Cost of Administration department (S1) = Direct costs+(Cost of Accounting department*35/145)

Cost of Accounting department (S2) = Direct costs+(Cost of Administration department*29/100)

S1 = $353,000+(S2*35/145) Equation A

S2 = $148,000+(S1*29%) Equation B

By substituting equation B into equation A

S1 = $353,000+[($148,000+S1*0.29)*35/145]

S1 = $353,000+($148,000*35/145)+(0.29*35/145*S1)

S1 = $353,000+$35,724.14+0.07S1

S1 - 0.07S1 = $388,724.14

0.93S1 = $388,724.14

S1 = $388,724.14/0.93 = $417,983

S2 = $148,000+($417,983*0.29) = $269,215

Allocation of cost of service departments using the step method (Amounts in $)

Departments	Administration	Accounting	Domestic	International
Direct Costs	353,000	148,000	945,000	3,560,000
Administration allocation (in the ratio of 29:48:23 no. of employees)	(417,983)	121,215	200,632	96,136
Accounting allocation (in the ratio of 35,000:22,000:88,000 No. of transactions)	64,983	(269,215)	40,846	163,386
Total cost allocated	0	0	1,186,478	3,819,522

ekkarill92 answered 11 months ago

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