Question

Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support departmentslong dashadministrative services​ (AS) and information systems ​(IS)long dashand two operating departmentslong dashgovernment consulting​ (GOVT) and corporate consulting​ (CORP). For the first quarter of 2017​, Phoenix's cost records indicate the​ following:

Data Table SUPPORT AS OPERATING GOVT CORP IS Total $ 600,000 $ 2,400,000 $ 8,756,000 $ 12,452,000 $ 24,208,000 Budgeted overhead costs before any interdepartment cost allocations Support work supplied by AS (budgeted head count) Support work supplied by IS (budgeted computer time) - 25% 40% 35% 100% 10% - 30% 60% 100%

1.	Allocate the two support​ departments' costs to the two operating departments using the following​ methods:
	a.	Direct method
	b.	​Step-down method​ (Allocate AS​ first)
	c.	​Step-down method​ (Allocate IS​ first

Answer 1

1-a)

	Support Departments		Operating Departments
Direct Method	AS	IS	GOVT	CORP	Total
Budgeted overhead costs before interdepartment cost allocations	$600000	$2400000	$8756000	$12452000	$24208000
Allocation of AS costs	(600000)		320000	280000
Allocation of IS costs		(2400000)	800000	1600000
Total budgeted overhead of operating departments	$0	$0	$9876000	$14332000	$24208000

Allocation of AS Department

Total support work supplied by AS of the operating departments= 40%+35%= 75%

Govt= $600000*40%/75%= $320000

Corp= $600000*35%/75%= $280000

Allocation of IS Department

Total support work supplied by IS of the operating departments= 30%+60%= 90%

Govt= $2400000*30%/90%= $800000

Corp= $2400000*60%/90%= $1600000

b)

	Support Departments		Operating Departments
Step-down method​ (Allocate AS​ first)	AS	IS	GOVT	CORP	Total
Budgeted overhead costs before interdepartment cost allocations	$600000	$2400000	$8756000	$12452000	$24208000
Allocation of AS costs	(600000)	150000	240000	210000
Allocation of IS costs		(2550000)	850000	1700000
Total budgeted overhead of operating departments	$0	$0	$9846000	$14362000	$24208000

Allocation of AS Department

IS= $600000*25%/100%= $150000

Govt= $600000*40%/100%= $240000

Corp= $600000*35%/100%= $210000

Allocation of IS Department

Total cost of IS department= $2400000+150000= $2550000

Total support work supplied by IS of the operating departments= 30%+60%= 90%

Govt= $2550000*30%/90%= $850000

Corp= $2550000*60%/90%= $1700000

c)

	Support Departments		Operating Departments
Step-down method​ (Allocate IS​ first)	AS	IS	GOVT	CORP	Total
Budgeted overhead costs before interdepartment cost allocations	$600000	$2400000	$8756000	$12452000	$24208000
Allocation of IS costs	240000	(2400000)	720000	1440000
Allocation of AS costs	(840000)		448000	392000
Total budgeted overhead of operating departments	$0	$0	$9924000	$14284000	$24208000

Allocation of IS Department

AS= $2400000*10%/100%= $240000

Govt= $2400000*30%/100%= $720000

Corp= $2400000*60%/100%= $1440000

Allocation of AS Department

Total cost of AS department= $600000+240000= $840000

Total support work supplied by AS of the operating departments= 40%+35%= 75%

Govt= $840000*40%/75%= $448000

Corp= $840000*35%/75%= $392000