Question

The Fleming Foundation is a charitable organization founded by Gaylord Fleming and Sandy Fleming. The Flemings intended for the charity to provide programs in health care for the elderly, particularly those in poverty. The two main program divisions of the foundation are mental health for the elderly and housing for the elderly. In addition to these programs, the Foundation also provides health care educational programs and has a significant fund-raising effort to help the Foundation grow and accomplish the goals of the founders. The Foundation is organized into two operating departments—education and program management. These departments are supported by two service departments—information technology (IT) and administration. To summarize, there are four departments (two service departments and two operating departments) and two programs (mental health and housing for the elderly). The service department costs are allocated to the operating departments, and then the operating department costs are allocated to the programs.

There are $400,000 of costs directly traceable to each of the four departments. An additional $40,500 of indirect costs is shared among the four departments—$24,000 of which is allocated to the departments based on labor hours and $16,500 of which is allocated to the departments based on the number of personnel (head count) in the departments.

The cost, labor hours, and head count in these departments in the most recent year are as follows:

Departments	Direct Cost				Labor Hours				Head Count
Information technology	$	5,000				2,000				1
Administration		129,000				2,000				4
Education		114,000				4,000				4
Program management		152,000				2,000				3
	$	400,000

IT serves education, administration, and program management 20%, 30%, and 50% of its time, respectively. Administration serves education, IT, and program management 60%, 10%, and 30% of its time, respectively.

The costs of the two operating departments (education and program management) are allocated to the two programs (mental health and housing) as follows: the costs in Education are allocated on the basis of labor hours in the programs, while the costs in program management are allocated using the head count used in the two programs. The following table shows the labor hours and head count consumption by the two programs.

	Labor Hours				Head Count
Mental health		1,000				1
Housing		1,000				2
Labor hours in education		2,000
Head count in program management						3

Required:

Determine the costs allocated to the mental health and housing programs using the (a) direct method, (b) the step method (assuming that IT goes first), and (c) the reciprocal method. (Round percentage calculations to 4 decimal places (e.g., 33.3333%). Do not round intermediate calculations. Round your final answer to nearest whole dollar amount.)

Answer 1

Answer with working notes is given below

Service Department Information Administration technology $5,000 $129,000 Operating department Program Education management $114,000 $152,000 $4,800 $4,800 $9,600 $4,800 Direct Cost Allocation of indirect costs labor hour based (2:2:4:2) Number of personnel based (1:4:4:3) Total Departmental Costs $1,375 $5,500 $5,500 $4,125 $11,175 $139,300 $129,100 $160,925 Program Information technology Administration Education Total Service rendered Information technology Administration 30% 20% management 50% 30% 100% 100% 10% 60% A Direct Allocation Service Department Information Administration technology $11,175 $139,300 Operating department Education | Program Total management $129,100 $160,925 $290,025 -$11,175 $3,193 $7,982 $11,175 Departmental costs before allocations Allocation Information technology (20:50) Administration (60:30) Total Allocated Cost -$139,300 $92,867 $46,433 $139,300 $0 $0 $225,160 $215,340 $440,500 Mental Health Housing Program Total Allocation Education (Ratio of 1:1) Program management (Ratio of 1:2) Total Cost after allocation $112,580 $71,780 $184,360 $112,580 $143,560 $256,140 $225,160 $215,340 $440,500 B Step method Service Department Operating department Information | Program Administration Education Total technology management $11,175 $139,300 $129,100 $160,925 $290,025 -$11,175 $3,353 $2,235 $5,588 $7,823 Departmental costs before allocations Allocation Information technology (30:20:50) Administration (60:30) Total Allocated Cost -$142,653 $95,102 $47,551 $142,653 $0 $0 $226,437 $214,063 $440,500 Mental Health Housing Program Total Allocation Education (Ratio of 1:1) Program management (Ratio of 1:2) Total Cost after allocation $113,218) $71,354 $184,573 $113,218 $142,709 $255,927 $226,437 $214,063 $440,500 C Reciprocal method Service Department Information Administration technology $11,175 $139,300 Operating department Program Education Total management $129,100 $160,925 $290,025 Departmental costs before allocations Allocation Information technology -25,881 7,764 5,176 5, 12,941 $18,117) Administration 14,706 -147,064 88,238 44,119 $132,358 Total Allocated Cost $0 $0 $222,515 $217,985 $440,500 Mental Health Housing Program Total Allocation Education (Ratio of 1:1) Program management (Ratio of 1:2) Total Cost after allocation $111,257 $72,662 $183,919 $111,257 $145,323 $256,580 $222,515 $217,985 $440,500 Simultaneous Equation method IT=11,175+10%A A= 139,300 + 30%IT IT= Information technology A=Administration Solving above equation IT= 11,175 + 10% (139,300+30% IT) IT= 11,175 +13,930 +0.03 ITO.97= $25,105 IT=$ 25, 105/0.97 Total Cost IT= $25,881 A= $147,064