Question

74 7 method (2) the step method maintenance Denartmental Cost Allocation Data Performance per of has three major functional areas: computer programming informatie software training. Carol Bingham, a pricing analyst in the accou asked to develop total costs for the functional areas. These costs will be ing a new contract. In computing these costs, Carol is considering three departmental allocation approach to allocate overhead costs: the direct and the reciprocal method. She assembled the following data from the information systems and facilities: Service Departments Production Departments Information Systems Sot Consulting Tre Information Systems $80,000 Computer Programming $160,000 Facilities $40,000 $190,000 $125.000 600 1,200 Budgeted overhead Information systems (hours) Facilities (square feet) 960 600 240 (LOT department Required Use 4 or more decimal places (e.g., 33.3333%) in your calculations. 1. Using computer usage time as the application base for the information systems departe feet of floor space as the application base for the facilities department, apply Overhe 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 going first). c. Reciprocal method. 2. Rather than allocate costs, how might Data Performance better assign the information systems costs? (CMA Adapted)

Answer 1

1. a) Direct Method Service Department Information System Facilities Production Department Information Computer Software System Programming Training Consulting 160,000 190,000 125,000 40,000 10,000 30,000 40,000 Direct Overheads Allocation of Information Systems Dept costs (Ratio of 1200:300:900) 80,000 -80,000 - 40,000 17,778 11,111 11,111 Allocation of Facilities Dept costs (Ratio of 960:600:600) Total $217,778 $211,111 $166,111 1. b) Step Method- Allocating Information Systems Dept costs first Service Department Facilities Information System Overheads 80,000 Allocation of Information Systems Dept costs | -80,000 (Ratio of 600:1200:300:900) Production Department Information Computer Software | System Programming Training Consulting 160,000 190,000 125,000 32,000 8,000 24,000 40,000 16,000 -56,000 24,889 15,556 15,556 Allocation of Facilities Dept costs (Ratio of 960:600:600) Total $216,8890 $213,556 $164,556 1. b) Step Method- Allocating Facilities Dept costs first Service Department Facilities Information System 80,000 4,000 Production Department Information Computer Software System Programming Training Consulting 160,000 190,000 125,000 16,000 10,000 10,000 Overheads Allocation of Facilities Dept costs (Ratio of 240:960:600:600) 40,000 -40,000 -84,000 42,000 10,500 31,500 Allocation of Information Systems Dept costs (Ratio of 1200:300:900) $218,000 $210,500 $166,500 1. c) Reciprocal Department Service Department Information System Facilities Production Department Information Computer Software System Programming Training Consulting 160,000 190,000 125,000 34,286 8,571 25,714 22,857 14,286 14,286 Overheads Allocation of Information System Allocation of Facilities 80,000 -85,714 5,714 40,000 17,143 -57,143 Total $217,143 $212,857 $165,000 2. Information system department cost can be better assigned on activities consumed for each department rather than allocating working note Information System Facilities Software Training Total 600 Information System (hours) Facilities (square feet) Information System Information Computer System Programming Consulting 1,200 300 960 600 40% 10% 40% 240 900 600 30% 25% 3,000 2,400 100% 100% 20% Facilities 25% Simultaneous Equation method IS=80,000+10%F F= 40,000 + 20%IS IS= information System F= Facilities Solving above equation IS= 80,000 + 10% (40,000+20% F) IS= 80,000 +4,000 +0.02 F 0.98=84000 S= 84,000/0.98 Total Cost IS= 85,714 F= 57,143