Question

Question 41 on chapter 7. Book Cost Management 7th edition.

	Support Departments			Operating Departments
	Information Technology	Operations		Claims Processing	Admisnistration	Sales
Information Technology		20		20	40	20
Operations	10			10	50	30
IT	600,000
Operations	1,800,000
Claims Process.	450,000
Administration	850,000
Sales	650,000
Total Cost	4,350,000

Required Use 4 or more decimal places in your calculations. Allocate the $4350,000 total departmental costs to all three operating departments using (a) the direct method, (b) the step method, and 9c) the reciprocal method.

Answer 1

Solution a:

From	Service Department Cost Allocation - Direct Method
	Service Department		Operating Departments
	IT	Operations	Claim Processing	Administartion	Sales
Direct charges of department	$600,000.00	$1,800,000.00	$450,000.00	$850,000.00	$650,000.00
IT (2:4:2)	-$600,000.00		$150,000.00	$300,000.00	$150,000.00
Operations (1:5:3)		-$1,800,000.00	$200,000.00	$1,000,000.00	$600,000.00
Total	$0.00	$0.00	$800,000.00	$2,150,000.00	$1,400,000.00

Solution b:

From	Service Department Cost Allocation - Step Method (Allocation of IT First)
	Service Department		Operating Departments
	IT	Operations	Claim Processing	Administartion	Sales
Direct charges of department	$600,000.00	$1,800,000.00	$450,000.00	$850,000.00	$650,000.00
IT (2:2:4:2)	-$600,000.00	$120,000.00	$120,000.00	$240,000.00	$120,000.00
Operations (1:5:3)		-$1,920,000.00	$213,333.33	$1,066,666.67	$640,000.00
Total	$0.00	$0.00	$783,333.33	$2,156,666.67	$1,410,000.00

From	Service Department Cost Allocation - Step Method (Allocation of operation First)
	Service Department		Operating Departments
	IT	Operations	Claim Processing	Administartion	Sales
Direct charges of department	$600,000.00	$1,800,000.00	$450,000.00	$850,000.00	$650,000.00
Operations (1:1:5:3)	$180,000.00	-$1,800,000.00	$180,000.00	$900,000.00	$540,000.00
IT (2:4:2)	-$780,000.00		$195,000.00	$390,000.00	$195,000.00
Total	$0.00	$0.00	$825,000.00	$2,140,000.00	$1,385,000.00

Solution c:

Service department cost = Direct Cost + Allocated Cost

IT Department Cost = $600,000 + 0.10 * Operation Cost

                                                   

Operation Department Cost = $1,800,000 + 0.20 * IT Department Cost

                               

Operation department cost = $1,800,000 + 0.20 * ($600,000 + 0.10 * Operation Cost)

Operation department cost = $1,800,000 + $120,000 + 0.02*Operation Cost

Operation department cost = $1,920,000 / 0.98 = $1,959,184

IT Department Cost = $600,000 * $1,959,184 * 10% = $795,918

From	Service Department Cost Allocation - Reciprocal Method
	Service Department		Operating Departments
	IT	Operations	Claim Processing	Administartion	Sales
Direct charges of department	$600,000	$1,800,000	$450,000	$850,000	$650,000
IT (2:2:4:2)	-$795,918	$159,184	$159,184	$318,367	$159,184
Operations (1:1:5:3)	$195,918	-$1,959,184	$195,918	$979,592	$587,755
Total	$0	$0	$805,102	$2,147,959	$1,396,939