In: Accounting
Marin Company produces two software products (Cloud-X and Cloud-Y) in two separate departments (A and B). These products are highly regarded network maintenance programs. Cloud-X is used for small networks and Cloud-Y is used for large networks. Marin is known for the quality of its products and its ability to meet dates promised for software upgrades. Department A produces Cloud-X, and department B produces Cloud-Y. The production departments are supported by two support departments, systems design and programming services. The sources and uses of the support department time are summarized as follows:
From | To | Total Labor Hours | ||||||||||||||||
Design | Programming | Department A | Department B | |||||||||||||||
Design | - | 5,000 | 1,000 | 9,000 | 15,000 | |||||||||||||
Programming | 400 | - | 600 | 1,000 | 2,000 | |||||||||||||
The costs in the two service departments are as follows:
Design | Programming | ||||||
Labor and materials (all variable) | $ | 104,000 | $ | 68,400 | |||
Depreciation and other fixed costs | 72,400 | 4,000 | |||||
Total | $ | 176,400 | $ | 72,400 | |||
Required:
1. Determine the total support costs allocated to each of the producing departments using (a) the direct method, (b) the step method (design department goes first), and (c) the reciprocal method? (Do not round intermediate calculations. Round your final answer to nearest whole dollar amount.)
2. The company is considering outsourcing programming services to DDB Services Inc. for $52.00 per hour. Should Marin do this?
Note: there's 2 requirements , please make sure you do both with explaination :)
1.
The Direct Method:
Please note that this method can’t be used to allocate costs to other service departments, rather it can only be used to allocate costs to production departments.
Departmental allocation: Production department units / Total Units for All production departments * Departmental costs
System Design Costs to Department A: $176400 * 1000/10000 = $17640
System Design Costs to Department A: $176400 * 9000/10000 = $158760
Programming Services costs to Department A: $72400 * 600/1600 = $27150
Programming Services costs to Department B: $72400 * 1000/1600 = $45250
The Step-Down Method:
It allocates a service department’s costs to service departments and production departments. This method sequentially allocates service department costs with the start off department that provides most of the services to other service departments and finishing with the one that provides the least services.
Service | Production | |||
Design | Programming | Department A | Department B | |
Departmental costs before allocation | 176400 | 72400 | ||
First Step | -176400 | 58800 | 11760 | 105840 |
Subtotal | 0 | 131200 | 11760 | 105840 |
Second Step | -131200 | 49200 | 82000 | |
Total | 0 | 0 | 60960 | 187840 |
The Reciprocal Method:
It fully recognizes all interdepartmental service costs using simultaneous equations.
System Design (S) = $176400 + (400/2000 * Programming Services)
Programming Services (P) = $72400 + (5000/15000 * System design)
OR,
S = $176400 + 0.2P
P = $72400 + 0.33S
Substituting,
S = $176400 + 0.2 ($72400 + 0.33S)
S = $176400 + $14480 + 0.066S
S – 0.066S = $190880
0.934S = $190880
S = $204368.30
Service | Production | |||
Design | Programming | Department A | Department B | |
Departmental costs before allocation | 176400 | 72400 | ||
First Step | ($204,368.30) | 68122.78 | 13624.55 | 122620.97 |
Subtotal | -27968.3 | 140522.78 | 13624.55 | 122620.97 |
Second Step | 27968.3 | -140522.78 | 42224.96 | 70329.52 |
Total | 0 | 0 | 55849.51 | 192950.49 |
2.
Programming service costs, if outsourced would lead to extinguishment of the total variable cost of $68400. Depreciation and other fixed costs being fixed in nature is irrelevant for the decision making.
Outsourcing cost: $52.00 * 2000 = $104000
Cost savings: $68400
Net Savings = ($35600)
Since, there is additional cost involvement of $35600, Marin should not go for outsourcing.