Question

Problem 1 Samsung has two operating/user departments, Gen 4 & Gen 5. The two support departments are Information Technology (IT) & Product Development (PD). The costs incurred in each of these departments are as follows: Gen 4 $300,000 Gen 5 $480.000 IT $60,000 PD $150,000 The actual level of support is as follows: Supplied by Used by ITPD Gen 4 Gen 5 10% 30% 60% PD 20% 25% 55% Determine the cost allocated to: 1. Gen 4 using the direct method 2. Gen 5 using the direct method 3. Gen 4 using the step-down method (allocating IT first) 4. Gen 4 using the step-down method (allocating PD first) 5. Gen 4 using the reciprocal method 6. Gen 5 using the reciprocal method

Answer 1

Q 1 & 2

Direct Method
	Service Dept	Service Dept	Operating Dept	Operating Dept
	IT	PD	Gen 4	Gen 5
Cost	60,000.00	150,000.00	300,000.00	480,000.00
IT Cost Allocated	(60,000.00)	-	20,000.00	40,000.00
PD Cost Allocated	-	(150,000.00)	46,875.00	103,125.00
Total Cost	-	-	366,875.00	623,125.00

In Direct Method, the cost incurred by Service Dept. are allocated to Operative Dept. on a suitable allocation basis. Here the allocation is percentage is given in the question.

However, the allocation to service dept. itself is ignored in Direct Method. hence we made the allocation base exclusively to operative depts. as such in the same ratio. Hence IT cost is allocated using 30/90 to Gen 4 and at 60/90 to Gen 5.

Similary PD cost is allocated in the ratio 25:55 among Gen4 and Gen 5 respectively.

Q3 & 4

Step Method (Allocating IT first)
	Service Dept		Operating Dept
	IT	PD	Gen 4	Gen 5
Cost	60,000.00	150,000.00	300,000.00	480,000.00
IT Cost Allocated	(60,000.00)	6,000.00	18,000.00	36,000.00
PD Cost Allocated	-	(156,000.00)	48,750.00	107,250.00
Total Cost	-	-	366,750.00	623,250.00

Step Method (Allocating PD first)
	Service Dept		Operating Dept
	IT	PD	Gen 4	Gen 5
Cost	60,000.00	150,000.00	300,000.00	480,000.00
PD Cost Allocated	30,000.00	(150,000.00)	37,500.00	82,500.00
IT Cost Allocated	(90,000.00)	-	30,000.00	60,000.00
Total Cost	-	-	367,500.00	622,500.00

In Step Method, service departments are allocated among service and operating departments. However, the cost is not allocated back to a dept. from which entire cost has been allocated.

Q5 & 6

Reciprocal Method
	Service Dept		Operating Dept
	IT	PD	Gen 4	Gen 5
Cost	60,000.00	150,000.00	300,000.00	480,000.00
IT Cost Allocated	(91,836.72)	9,183.67	27,551.02	55,102.03
PD Cost Allocated	31,836.73	(159,183.67)	39,795.92	87,551.02
Total Cost	0.01	0.00	367,346.93	622,653.05

Under Reciprocal method, the total cost to be allocated between departments is found using a formula.

Total IT Cost = IT Cost + 20% of Total PD Cost

Total PD Cost = PD Cost + 10 % of Total IT Cost

Let Total IT Cost be A:

A=IT Cost + 20 % (Total PD Cost)

= IT Cost + 20% (PD Cost + 10% of Total IT Cost)

=IT Cost + 20% (PD Cost + 10% of A)

= 60,000+ 20 %(150,000 + 10 % of A)

= 60,000 + 30,000 + 2 % of A

= 90,000 + 2 % of A

A - 2 % of A = 90,000

98 % of A = 90,000

A = 90,000 / 98%

A = 91,836.73

Which means Total IT Cost to be allocated = 91,836.73

Total PD Cost = PD Cost + 10 % of A

= 150,000+ 10% of 91,836.73

= 150,000+ 9,183.67

= 159,183.67

Allocate exactly as per the allocation matrix.