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 Information Computer Systems Software Systems Facilities Programming Consulting Training Total $83,000 $36,000 $142,000 $190,000 $140,000 $591,000 800 400 800 2,000 4,000 220 440 440 1,100 2,200 Budgeted overhead (base) Information Systems (computer hours) Facilities (square feet) 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. (Round percentage calculations to 4 decimal places (e.g., 33.3333%). For all requirements, Do not round your intermediate calculations. Round your final answers to nearest whole dollar amount.) Programming Consulting Training Total a. Direct Method Step Method (Information Systems Goes First) Step Method (Facilities Goes First) Reciprocal method

Answer 1

Direct Method Information System Overhead Allocation Base Usage Hour by Production Department Cost per Hour $ 83,000 Usage Time 3200 $ 25.94 Allocation Hours Used Cost per Hour Computer Programming Information System Consulting Software Training 400 800 2000 $25.94 $ 25.94 $25.94 Cost Allocation $ 10,375 $ 20,750 $ 51,875 $ 83,000 Facilties Overhead Allocation Base Usage Area by Production Department Cost per Feet $36,000 Square Feet 1980 $ 18.18 Allocation Space Used Computer Programming Information System Consulting Software Training 440 440 1100 Cost per Feet $ 18.18 $ 18.18 $ 18.18 Cost Allocation $8,000 $ 8,000 $ 20,000 $ 36,000 b. Step Method (Information Systems Goes First) Information Systems Overhead Usage Hour Cost per Hour $ 83,000 4000 $ 20.75 Allocation Facilities Computer Programming Information System Consulting Software Training Space Used 800 400 800 2000 Cost per Hour 20.75 20.75 20.75 20.75 Cost Allocation $ 16,600 $ 8,300 $ 16,600 $ 41,500 $ 83,000 Total Facilties Overhead Cost ($16,600 + $ 36,000) Space Used (440+440 +1100) Cost per Feet $ 52,600 1980 $26.57 Space Used Allocation Computer Programming Information System Consulting Software Training 440 440 1100 Cost per Feet 26.56 26.56 26.57 Cost Allocation $ 11,686 $ 11,686 $ 29,227 $ 52,600

b. Step Method (Facilties goes first) Total Facilties Overhead Space Used Cost per Feet $36,000 2200 $ 16.36 Allocation Space Used Cost per feet Information System Computer Programming Information System Consulting Software Training 220 440 440 1100 16.36 16.36 16.36 16.36 Cost Allocation $ 3,600 $ 7,200 $ 7,200 $ 17,999 $ 36,000 Information System Cost ($83,000 + $3,600) Usage Hour (400 +800+2000) Cost Per Hour $ 86,600 3200 $ 27.06 Allocation Space Used Computer Programming Information System Consulting Software Training 400 800 2000 Cost per Hour 27.06 27.06 27.06 Cost Allocation $ 10,825 $ 21,650 $ 54,125 $ 86,600 C Reciprocal Method Information Systems Facilties Systems Machine Hours % of Hours Sq Ft % of Area 10% 220 Information Sytems Facilites Computer Programming Information System Consulting Software Training Total 800 400 800 2000 4000 20% 10% 20% 50% 100% 440 440 1100 20% 20% 50% 100% 2200 Total Information Systems Cost = Total Facilities Cost = $ 83,000 + 10% of total Facilties Cost $36,000 + 20% of total Information Systems Cost Let us Assume Total Facilties Cost to be X. Total Information Systems Cost = Total Facilities Cost = X = X = .98X = $ 83,000 + 10% of X $83,000+ 0.X $36,000 + 20% of total Information Systems Cost $36,000 + 20% of ($83,000+ 0.X) $36,000+ $16,600 +.02X $ 52,600 $ 53,673.47 $ 53,673.47 $ 13.42 Total Facilities Cost = Cost per Hour Total Information Systems Cost = $ 83,000 + 10% of total Facilties Cost $ 83,000 + 10% of $53,673.47 $ 88,367.35 $ 40.17 Cost Per Feet

Allocation Space Used Computer Programming Information System Consulting Software Training 440 440 1100 Cost per feet 40.17 40.17 40.17 Cost Allocation $ 17,673 $ 17,673 $ 44,184 $ 79,531 Allocation Hour Used Cost per Hour Computer Programming Information System Consulting Software Training 400 800 2000 13.42 13.42 13.42 Cost Allocation $ 5,367 $ 10,735 $ 26,837 $ 42,939 a Direct Method Step Method (Informatio Goes First) Step Method (Facilites Goes First) c. Reciprocal Method Programming $ 18,375 $ 19,986 $ 18,025 $ 23,041 Consulting $ 28,750 $ 28,286 $ 28,850 $ 28,408 Training $ 71,875 $ 70,727 $ 72,124 $ 71,020 Total $ 119,000 $ 119,000 $ 119,000 $ 122,469
Due to round off there can be change in final figure.