Question

Data Performance, a computer software consulting company, has three major functional areas: computer programming, information systems consulting, and software training. Carol Bingham, a pricing analyst, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Carol is considering three different methods of the departmental allocation approach to allocate overhead costs: the direct method, the step method, and the reciprocal method. She assembled the following data from the two service departments, information systems and facilities:

	Service Departments			Production Departments
	Information Systems	Facilities	Computer Programming	Information Systems Consulting	Software Training	Total
Budgeted overhead (base)	$70,000	$39,000	$166,000	$200,000	$139,000	$614,000
Information Systems (computer hours)		1,200	600	1,200	3,000	6,000
Facilities (square feet)	240		480	480	1,200	2,400

Required:

1. Using computer usage time as the allocation base for the information systems department and square feet of floor space as the application base for the facilities department, apply overhead from these service departments to the production departments, using these three methods:

a. Direct method.

b. Step method (both for the information systems department going first and for the facilities department going first).

c. Reciprocal method.

(Round percentage calculations to 4 decimal places (e.g., 33.3333%). For all requirements, Do not round your intermediate calculations. Round your final answers to nearest whole dollar amount.)

Required:

1. Using computer usage time as the allocation base for the information systems department and square feet of floor space as the application base for the facilities department, apply overhead from these service departments to the production departments, using these three methods:

a. Direct method.

b. Step method (both for the information systems department going first and for the facilities department going first).

c. Reciprocal method.

(Round percentage calculations to 4 decimal places (e.g., 33.3333%). For all requirements, Do not round your intermediate calculations. Round your final answers to nearest whole dollar amount.)

Required:

1. Using computer usage time as the allocation base for the information systems department and square feet of floor space as the application base for the facilities department, apply overhead from these service departments to the production departments, using these three methods:

a. Direct method.

b. Step method (both for the information systems department going first and for the facilities department going first).

c. Reciprocal method.

(Round percentage calculations to 4 decimal places (e.g., 33.3333%). For all requirements, Do not round your intermediate calculations. Round your final answers to nearest whole dollar amount.)

Programing consulting training Tatal

a direct method

b step method information systems department going first

step method facilities department going first

c reciprocal method

Answer 1

Solution 1a:

From	Service Department Cost Allocation - Direct Method
	Service Department		Production Departments
	Info System	Facilities	Computer programming	Info System Consulting	Software training
Direct charges of department	$70,000	$39,000	$166,000	$200,000	$139,000
Info System (600:1200:3000)	-$70,000		$8,750	$17,500	$43,750
Facilities (480:480:1200)		-$39,000	$8,667	$8,667	$21,667
Total	$0	$0	$183,417	$226,167	$204,417

Solution 1b:

From	Service Department Cost Allocation - Step Method (Allocation of Info System First)
	Service Department		Production Departments
	Info System	Facilities	Computer programming	Info System Consulting	Software training
Direct charges of department	$70,000	$39,000	$166,000	$200,000	$139,000
Info System (1200:600:1200:3000)	-$70,000	$14,000	$7,000	$14,000	$35,000
Facilities (480:480:1200)		-$53,000	$11,778	$11,778	$29,444
Total	$0	$0	$184,778	$225,778	$203,444

From	Service Department Cost Allocation - Step Method (Allocation of facilities First)
	Service Department		Production Departments
	Info System	Facilities	Computer programming	Info System Consulting	Software training
Direct charges of department	$70,000	$39,000	$166,000	$200,000	$139,000
Faciliites (240:480:480:1200)	$3,900	-$39,000	$7,800	$7,800	$19,500
Info System (600:1200:3000)	-$73,900		$9,238	$18,475	$46,188
Total	$0	$0	$183,038	$226,275	$204,688

Solution 1c:

Service department cost = Direct Cost + Allocated Cost

Information system Cost = $70,000 + [240/2400]* Facilities cost

= $70,000 + 0.10*Facilities cost

Facilities Cost = $39,000 + [1200 / 6000]* information system Cost

= $39,000 + 0.20 * information system Cost

Facilities Cost = $39,000 + 0.20 ($70,000 + 0.10*Facilities Cost)

Facilities Cost = $39,000 + $14,000 + 0.02*Facilities Cost

Facilities Cost = $53,000 / 0.98 = $54,082

Information system Cost = $70,000 + 0.10*$54,082 = $75,408

From	Service Department Cost Allocation - Reciprocal Method
	Service Department		Production Departments
	Info System	Facilities	Computer programming	Info System Consulting	Software training
Direct charges of department	$70,000	$39,000	$166,000	$200,000	$139,000
Info System (1200:600:1200:3000)	-$75,408	$15,082	$7,541	$15,082	$37,704
Faciliites (240:480:480:1200)	$5,408	-$54,082	$10,816	$10,816	$27,041
Total	$0	$0	$184,357	$225,898	$203,745