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		–			28			46			26
Transactions		32,000			–			25,000			100,000
Department direct costs	$	363,000		$	145,000		$	935,000		$	3,590,000

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
• Required B
• Required C

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 $363,000 $145,000 $935,000 $3,590,000 Administration allocation (363,000) Accounting allocation 0 Total cost $0 $145,000 $935,000 $3,590,000

Answer 1

- TO W Allocation of Cost using Direct Method To 7 From Administration Accounting Domestic International Total 5 No of Employees 46 5 Transactions 25,000 100,000 125,000 26 72 363,000 145,000 935,000 3,590,000 5,033,000 3 Department Cost Administration Allocation on the basis of employees Accounting Allocation on the basis of number o of transactions 1 Total Cost -363,000 231,917 131,083 -145,000 29,000 1,195,917 116,000 3,837,083 5,033,000

А Allocation of Cost using Step Method To - From Administration Accounting Domestic International Total - No of Employees 28 46 26 100 Transactions 25,000 100,000 125,000 3 63,000 145,000 935,000 3,590,000 5,033,000 - Department Cost Administration Allocation on the basis of employees Accounting Allocation on the basis of number of transactions 1 Total Cost -363,000 101,640 166,980 94,380 -246,640 49,328 1,151,308 197,312 3,881,692 5,033,000

А B U Allocation of Cost using Reciprocal Method Administration Accounting No of Employees % total Transactions % total 32000 28 Administration Accounting Domestic International 20% 0% 16% 64% 28% 46% 26% 46 26 25,000 100,000 100 157000 Using Reciprocal Method, we would calculate the cost as follows Admin Cost = 363000 + Cost from Accounting allocated to Admin Accounting Cost = 145000+ Cost from Admin allocated to Accounting Taking the second equation further Accounting Cost = 145000+ Cost from Admin allocated to Accounting Now, Cost from Admin allocated to Accounting is 28% of Total Admin Cost. Accounting Cost = 145000+ 28% of Admin Cost Now, Admin cost is 363000 + Cost from Accounting allocated to Admin So, re-forming the equation,

40 Accounting Cost = 145000+ 28% of (363000 + Cost from Accounting allocated to Admin) 41 Seeing the above table, we can observe that cost of accounting allocated to Admin is 20% of the total Accounting cost. 42 So, re-forming the equation, 43 Accounting Cost = 145000+ 28% of (363000 + 20% of Accounting Cost allocated to Admin) 44 48 45 Let Accounting cost be A A = 145000+ 101640+ 0.056A 47 Solving the above equation, we would ger A = 261,271.19 49 Hence, 50 Accounting Cost 261,271.19 51 Admin Cost = 363000 + Cost from Accounting allocated to Admin 363000+ 0.20 * 261271.19 53 Admin Cost = 415,254.24 Allocation of Cost using Step Method Το 56 From Administration Accounting Domestic International Total 57 No of Employees 26 100 58 Transactions 32,000 25,000 100,000 157,000 55 28 46 935,000 3,590,000 5,033,000 191,016.95 107,966.10 60 Department Cost 363,000 145,000 Administration Allocation on the 61 basis of -415,254 116,271.19 Accounting Allocation on the basis of number of 62 transactions 53,252.73 -261,271 63 Total Cost 998 - Rounding off Check 41,603.69 1,167,621 166,414.77 3,864,381 5,033,000

Answer 2

part A) Domestic 

46+26= 72

administration allocation: 363,000*46/72= 231,916.66666667 or 231.917

25,000+100,000= 125,000

accounting allocation: 145,000*25,000/125,000= 29,000

international

administration allocation:363,000- 231,917= 131,083

accounting allocation: 145,000- 29,000= 116,000

Answer 3

part b) accounting 28+46+26= 100

admin allocation 363,000*28/100= 101,640

accounting allocation 145,000+ 101,640= 246,640 change to -246,640

dometsic

admin allocation 363,000*46/100= 166,980

accounting allocation  246,640*25,000/125000= 49,328

international

admin allocation= 363,000- 101,640- 166,980= 94,380

accounting allocation 246,640- 49,328= 197,312