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		40,000			–			24,000			96,000
Department direct costs	$	353,000		$	146,000		$	945,000		$	3,640,000

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:

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 $353,000 $146,000 $945,000 $3,640,000 Administration allocation (353,000) Accounting allocation (146,000) Total cost $0 $0 $945,000 $3,640,000

Required B:

Allocate the cost of the service departments to the operating departments using the step method. Start with Administration. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

	To From Administration Accounting Domestic International Department costs Administration allocation Accounting allocation Total cost $0 $0 $0 $0

Required C:

Allocate the cost of the service departments to the operating departments using the reciprocal method. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign. Round your final answers to the nearest whole dollar amounts.)

	To From Administration Accounting Domestic International Department costs Administration allocation Accounting allocation Total cost $0 $0 $0 $0

Answer 1

B.				To
	From			Administration	Accounting	Domestic	International
	Department costs			353000	146000	945000	3640000
	Administration allocation			-353000	98840	162380	91780
	(On the basis of employees at 28:46:26 or 14:23:13)				353000*(14/50)	353000*(23/50)	353000*(13/50)
	Accounting allocation				-244840	48968	195872
	(On the basis of transactions at 24000:96000 or 1:4)					244840*(1/5)	244840*(4/5)
	Total cost			0	0	1156348	3927652
c.	Under reciprocal method it is assumed that cost from other service departments is included in the cost of individual service departments
	Total cost of a service department=Direct cost of the service department+Cost allocated to the service department
	Let's assume that cost of administration=D1
	Cost allocated from the accounting on the basis of transactions
	Transactions for administration=40000
	Total transaction=40000+24000+96000=160000
	Ratio for allocation to administration=40000/160000=0.25
	D1=353000+0.25 D2 …………. 1
	Let's assume that cost of accounting=D2
	Cost allocated from the administration on the basis of employees
	Employees for accounting=28
	Total employees=28+46+26=100
	Ratio for allocation to accounting=28/100=0.28
	D2=146000+0.28 D1 …………. 2
	Apply 1 in 2
	D2=146000+0.28*(353000+0.25D2)
	D2=146000+98840+0.07D2
	D2=244840+0.07D2
	D2-0.07D2=244840
	0.93D2=244840
	D2=244840/0.93=$ 251881.7=$ 263268.8=$ 263269
	Apply D2 in 1
	D1=353000+(0.25*263269)=353000+65817.25=$ 418817.3=$ 418817
	Allocation:
	From			Administration	Accounting	Domestic	International
	Department costs			353000	146000	945000	3640000
	Administration allocated			-418817	117269	192656	108892
	(On the basis of employees at 28:46:26 or 14:23:13)				(418817*14/50)	(418817*23/50)	(418817*13/50)
	Accounting allocation			65817	-263269	39490	157961
	(On the basis of transactions at 40000:24000:96000 or 5:3:12)			(263269*5/20)		(263269*3/20)	(263269*12/20)
	Total cost allocated			0	0	1177146	3906854