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)	$79,000	$31,000	$169,000	$195,000	$126,000	$600,000
Information Systems (computer hours)		2,000	1,000	2,000	5,000	10,000
Facilities (square feet)	230		690	690	690	2,300

Part 1

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.

Answer 1

	Allocation of overheads
a	Direct method
		Service Departments		Production Departments
		Information system	Facilities	Computer Programming	Information Systems Consulting	Software Training	Total
	Budgeted Overheads	$79,000	$31,000	$169,000	$195,000	$126,000	$600,000
	Information system overhead allocation	($79,000)		$9,875	$19,750	$49,375	$0
	Facilities overhead allocation		($31,000)	$10,333	$10,333	$10,333	$0
				$189,208	$225,083	$185,708	$600,000
		Production Departments
		Computer Programming	Information Systems Consulting	Software Training	Total
	Computer usage time	1000	2000	5000	8000
	Percentage of usage	12.50%	25.00%	62.50%
	Square feet	690	690	690	2070
	Percentage of floor space	33.3333%	33.3333%	33.3333%
b	Step method
	Information system department going first
		Service Departments		Production Departments
		Information system	Facilities	Computer Programming	Information Systems Consulting	Software Training	Total
	Budgeted Overheads	$79,000	$31,000	$169,000	$195,000	$126,000	$600,000
	Information system overhead allocation	($79,000)	$15,800	$7,900	$15,800	$39,500	$0
	Facilities overhead allocation		($46,800)	$15,600	$15,600	$15,600	$0
				$192,500	$226,400	$181,100	$600,000
			Production Departments
		Facilities	Computer Programming	Information Systems Consulting	Software Training	Total
	Computer usage time	2000	1000	2000	5000	10000
	Percentage of usage	20.00%	10.00%	20.00%	50.00%
	Square feet		690	690	690	2070
	Percentage of floor space		33.3333%	33.3333%	33.3333%
	Facilities Department going first
		Service Departments		Production Departments
		Information system	Facilities	Computer Programming	Information Systems Consulting	Software Training	Total
	Budgeted Overheads	$79,000	$31,000	$169,000	$195,000	$126,000	$600,000
	Facilities overhead allocation	$3,100	($31,000)	$9,300	$9,300	$9,300	$0
	Information system overhead allocation	($82,100)		$10,263	$20,525	$51,313	$0
				$188,563	$224,825	$186,613	$600,000
			Production Departments
		Information system	Computer Programming	Information Systems Consulting	Software Training	Total
	Computer usage time		1000	2000	5000	8000
	Percentage of usage		12.50%	25.00%	62.50%
	Square feet	230	690	690	690	2300
	Percentage of floor space	10%	30%	30%	30%
c	Reciprocal method
	Original cost of service departments
	Information system (X)	$79,000
	Facilities (Y)	$31,000
	After getting the share from distribution of service department
	X = $79000 + 10% Y
	Y = $31000 + 20% X
	By putting the value of facilities in equation (1)
	X = $79000+10% ($31000 +20%X)
	X = $79000+ $3100 + 0.02X
	X-0.02X = $82100
	0.98 x = $82100
	X = $82100/0.98 = $83775.51 or $83,776
	By putting the value of information system in Equation (2)
	Y = $31000 + 20% ($83776)
	Y = $31000 + 16755
	Y = $47755
		Service Departments		Production Departments
		Information system	Facilities	Computer Programming	Information Systems Consulting	Software Training	Total
	Budgeted Overheads	$79,000	$31,000	$169,000	$195,000	$126,000	$600,000
	Information system overhead allocation	($83,776)	$16,755	$8,378	$16,755	$41,888	$0
	Facilities overhead allocation	4776	($47,755)	$14,327	$14,327	$14,327	$0
				$191,704	$226,082	$182,215	$600,000
		Programming	Consulting	Training	Total
a	Direct Method	$189,208	$225,083	$185,708	$600,000
b	Step Method (Information systems goes first)	$192,500	$226,400	$181,100	$600,000
	Step Method (Facilities goes first)	$188,563	$224,825	$186,613	$600,000
c	Reciprocal Method	$191,704	$226,082	$182,215	$600,000