Question

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		–			21			46			33
Transactions		35,000			–			18,000			72,000
Department direct costs	$	361,000		$	142,000		$	950,000		$	3,680,000

Required:

a. Allocate the cost of the service departments to the operating departments using the direct method.
b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration.
c. Allocate the cost of the service departments to the operating departments using the reciprocal method.

• 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.)

	To From Administration Accounting Domestic International Department costs Administration allocation Accounting allocation Total cost $0 $0 $0 $0

• Required 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.)

	To From Administration Accounting Domestic International Department costs Administration allocation Accounting allocation Total cost $0 $0 $0 $0

• Required 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. Round your final answers to the nearest whole dollar amounts.)

	To From Administration Accounting Domestic International Department costs Administration allocation Accounting allocation Total cost $0 $0 $0 $0

Answer 1

• Required A

Allocation of the cost of the service departments to the operating departments using the direct method:

from	to administration	to accounting	to domestic	to international
Department costs	$ 361000	$ 142000	$ 950000	$ 3680000
Administration allocation	-$ 361000		$ 210202.52	150797.46
Accounting allocation		-$ 142000	$ 28400	$ 113600
total costs	0	0	$ 1188602.53 or $ 1188603 (round off )	$ 3944397.47 or $ 3944397

service department allocation rates as follows:

administration department :-

administration department cost = $ 361000

total employees in operating departments = 46 + 33 = 79

so allocation rate = 361000 / 79 = $ 4569.62 per employee

accounting department cost :-

accounting department cost = $ 142000

total transactions in operating departments = 18000 + 72000 = 90000

allocation rate = 142000 / 90000 = $ 1.57 per transaction

allocation of service depatment cost to each of operating department:

departments	domestic	international
administration	46 employees x $ 4569.62 per employee = $ 210202.52	33 employees x $ 4569.62 per employee = $ 150797.46
accounting	18000 transaction x $ 142000/90000 per transaction = $ 28400	72000 transactions x $ 142000 / 90000 = $ 113600

• Required B

Allocation of cost of the service departments to the operating departments using the step method :

from	to administration	to accounting	to domestic	to international
Department costs	$ 361000	$ 142000	$ 950000	$ 3680000
Administration allocation	-$ 361000	$ 75810	$ 166060	$ 119130
Accounting allocation		-$ 217810	$ 43562	$ 174248
total costs	0	0	$ 1159622	$ 3973378

in the stp method we start with highest service cost first. so administration cost will be allocated to all operating departments and one service department i.e. accounting so :

administration department cost = $ 361000

total employees in all operating departments and one service departments accounting = 21 + 46 + 33 = 100

so allocation rate = 361000 / 100 = $ 3610 per employee

allocation of administration service depatment cost to each of operating department and one accounting department

department	accounting	domestic	international
administration dept. cost	21 employees x $ 3610 per employee = $ 75810	46 employees x $ 3610 per employee = $ 166060	33 employees x $ 3610 per employee = $ 119130

:now we should allocate the accounting department cost. now accounting department cost has been changed we have original department cost of $ 142000 + administrative cost allocated above of $ 75810 so newaccounting deptt. costs $ 217810.

such accounting cost will be allocated based on number of transactions of operating departments.

accounting department cost = $ 142000 + $ 75810 = $ 217810

total transactions in operating departments = 18000 + 72000 = 90000

allocation rate = $ 217810 / 90000 per transaction

allocation of service depatment cost to each of operating department:

departments	domestic	international
accounting	18000 transactions x $ 217810 / 90000 per transaction = $ 43562	72000 transactions x $ 217810 / 90000 per transaction= $ 174248

• Required C

Allocate the cost of the service departments to the operating departments using the reciprocal method:

step 1 determination of allocation bases - we can calculate allocation base amount for each service department as follows :

administration department

departments	employees	in fraction form
administration	0	0
accounting	21	21/100
domestic	46	46/100
international	33	33/100
total	100

accounting department

departments	transactions	in fraction form
administration	35000	35000/125000
accounting	0	0
domestic	18000	18000/125000
international	72000	72000/125000
total	125000

step 2 set up the formulas - since adminstrative deptt. cost are allocated to accounting and accounting cost are allcated to administrative so first determine the total cost being allocated to both the administrative and accounting deptt. first

a) total administrative cost = adminstrative cost + cost allocated to administrative from accounting department

b) total accounting cost = accounting cost + cost allocated to accounting from administrative department

we will work with accounting cost formula in b) first i. e.

total accounting cost = accounting cost + cost allocated to accounting from administrative epartment

from step 1 we knoe that the cost allocation to accounting from administration is 21/100 x total administrative cost.

stilll we donot not know what is total administrative cost but we can put in new formula.

we can insert formula from a) for total administrative cost into total accounting formula b) as follows:

total accounting cost = $ 142000 + (21/100 x (of administrative cost + cost allocated to administrative from accounting)

we can see from step 1 that accounting cost allocated to administrative as total accounting cost x 35000/125000, adding this to our formula we niow have :

total accounting cost = 142000 + (21/100 x(361000+(total accounting cost x 35000/125000)))

using algebra we can assign total administrative cost a variable giving of A giving the formula

A = 142000+(21/100 x (361000+35000/125000 x A))

A= 142000+(21/100 x 361000 + 21/100x35000/125000xA)

A = 142000 + (75810 + 0.0588A)

A - 0.0588A = 142000+75810

0.9412 A = 217810

A =$ 231417.34

total accounting cost = $ 231417.34

total administrative cost = 361000 + 231417.34 x 35000/125000 = $ 425796.86

step 3 showing step allocation :

service department

particular	administrative in $	accounting in $
costs	361000	142000
administratve cost allocated	-425796.86	425796.86 x 21/100 = 89417.34
accounting cost allocated	231417.34 x 35000/125000 = 64796.86	-231417.34
total	0	0

Allocation of cost of the service departments to the operating departments using the reciprocal method :

from	to administration	to accounting	to domestic	to international
Department costs	$ 361000	$ 142000	$ 950000	$ 3680000
Administration allocation	-$ 425796.86	$ 425796.86 x 21/100 = $ 89417.34	$ 425796.86 x 46/100 = $ 195866.56	$ 425796.86 x 33/100 = $ 140512.96
Accounting allocation	$ 231417.34 x 35000/125000 = $ 64796.86	- $ 231417.34	$ 231417.34 x 18000/125000 = $ 33324.10	$ 231417.34 x 72000/125000 = $ 133296.38
total costs	0	0	$ 1179190.66	$ 3953809.34

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