Question

1.

Support Department Cost Allocation—Reciprocal Services Method

Blue Africa Inc. produces laptops and desktop computers. The company’s production activities mainly occur in what the company calls its Laser and Forming departments. The Cafeteria and Security departments support the company’s production activities and allocate costs based on the number of employees and square feet, respectively. The total cost of the Security Department is $273,000. The total cost of the Cafeteria Department is $180,000. The number of employees and the square footage in each department are as follows:

	Employees		Square Feet
Security Department	10		590
Cafeteria Department	24		2,400
Laser Department	40		4,000
Forming Department	50		1,600

Using the reciprocal services method of support department cost allocation, determine the total costs from the Security Department that should be allocated to the Cafeteria Department and to each of the production departments.

2.

Support Department Cost Allocation—Direct Method

Christmas Timber, Inc., produces Christmas trees. The trees are produced through a cutting and pruning process. Machine maintenance and janitorial labors are performed throughout the production process by nonproduction employees. Maintenance and janitorial costs are allocated based on machine hours used and the number of trees in each department, respectively. The company estimates that the cutting and pruning areas typically have about 27 and 63 trees, respectively, in them at 1 time. The company also estimates that the cutting process requires about 9 times as many machine hours as the pruning process. The total costs of each department are as follows:

Maintenance Department	$7,000
Janitorial Department	3,000
Cutting Department	54,000
Pruning Department	9,000

Using the direct method of support department cost allocation, determine the total cost of each production department after allocating all support costs to the production departments.

3.

Support department cost allocation—sequential method

Crystal Scarves & Co. produces winter scarves. The scarves are produced in the Cutting and Sewing departments. The Maintenance and Security departments support these production departments, and allocate costs based on machine hours and square feet, respectively. Information about each department is provided in the following table:

Department	Total Cost	Number of Employees	Machine Hours	Square Feet
Maintenance Department	$ 2,300	6	57	800
Security Department	3,000	4	0	600
Cutting Department	19,600	20	3,700	3,200
Sewing Department	20,800	18	5,550	4,000

Using the sequential method and allocating the support department with the highest costs first, allocate all support department costs to the production departments. Then compute the total cost of each production department.

	Cutting Department		Sewing Department
Production departmentsʼ total costs	$		$

Answer 1

Let "x" be the total cost incurred of cafeteria department Let "y" be the total cost incurred of security department Then, 2400 x = $180,000+ y............. (1) 8000 10 y = $273,000 + 10 ...........(2) 100 Substitute the value of "y" in equation (1) 2400 1= $180,000+ (2,400+4,000 +1,600) $273,000 + 100 2400 10 x = $180,000+ - $273.000 + 8000 100 x = $180,000+0.3 ($273,000 +0.1x) x = $180,000+ $81,900 +0.03x x -0.03x = $ 261,900 0.97x = $261,900 $261,900 .X =- 0.97 1 = $270,000 Substitute the value of "x" is equation (2) 10 y = $273,000+= X 100 10 y = $273,000+ x $270,000 100 y = $273,000 + $ 27,000 y = $300,000

Therefore, total cost incurred of cafeteria department is $270,000 and total cost incurred of security department is $300,000. Allocate the cost as follows: Service department Production department Cafeteria dept Security dept Laser dept Forming dept $ 180,000 $273,000 3 Total direct costs 4 Allocations: 5 Cafeteria dept 6 Security dept 7 Total cost after allocation $ 270,000 $ 90,000 $0 $27,000 $ 300,000 $0 $ 108,000 $150,000 $ 258,000 $135,000 $ 60,000 $ 195,000 | Cafeteria dept Laser dept $90,000 $150,000 Forming dept $60,000 10 Security dept cost allocation Formulae used: Service department Cafeteria dept Security dept 180000 273000 Production department Laser dept Forming dept 3 Total direct costs 4 Allocations: 5 Cafeteria dept 6 Security dept 7 Total cost after allocation - 270000 -270000*10/100-270000*40/100 =270000*50/100 =300000*2400/8000-300000 =300000*4000/8000 =300000 1600/8000 ASUM(B3:86) SUM(C3:C6) SUM(D3:06) TESUM(E3:E6) Cafeteria dept 10 Security dept cost allocation =B6 Laser dept =D6 Forming dept =E6