Question

Phoenix Partners provides management consulting services to government and Corporate clients Phoenix has two support depart ament e services (AS) and information systems (15) and two operating departments-government consting (GOVT) and corporate consulting (CORP) For the first quarter of 2017, Phoenix's cost records indicate the following (Click the icon to ww the cost records The two Sport department costs have been allocated to the two operating departments the vect method and the step-down method (AS department fest) and the step down method (15 department . The results of the location ale as follows: Chok the icon to view the direct method) Read the requirements Click the icon to view the step-down method (AS first) Click the icon to view the step down method (I first) Click the icon to view a summary of the three methods ) Requirement 1a. Allocate the two support departments costs to the two operating departments using the reprocal method Fest determine the linear equations for each support department AS: 5600,000 + 0.10 is $2.400.000 . 025 AS Now allocate the support department costs AS and is reciprocal method (Round decal cacbon the de when decreasing departments by acting costs Ena cons that you demned in the respo hews operating departments using the c es, XOOX, and your a wers to the newest whole dar se parentheses or a minus bor any zero balances) Support Departments Operatin Departments

Answer 1

Answer with working notes is given below

There may be slight rounding off difference due to decimals but conceptually answer is right

1 a) Linear Equation Support Departments AS IS $600,000 $2,400,000 Operating Departments GOVT CORP Total $8,756,000 $12,452,000 $21,208,000 Budgeted Overhead Costs Allocation Allocation of AS Costs Allocation of Is Costs Total Budgeted overhead of Operating Department | -$861,538) $261,539 $0.00 $215,385 $2,615,385 $0.00 $344,615 $301,538 $784,616 $1,569,231 $9,885,231 $14,322,769 $24,208,000 Simultaneous Equation method AS=$600,000+0.10 IS IS= $2,400,000+ 0.25 AS ASN Administrative services IS= Information system Solving above equation AS= 600,000+ 0.10 (2,400,000+0.25AS) AS= 600,000 + 240,000 +0.025 AS 0.975 AS= $840,000 AS= $840,000/0.975 Total Cost AS=$ 8,61,538 IS=$ 2,615,385 1b) Repeated Iterations Method Note: The service department having highest cost is allocated first in repeated iterations method Support Departments AS IS $600,000 $2,400,000 Operating Department GOVT CORP Total $8,756,000 $12,452,000 $21, 208,000 $240,000 -$2,400,000 $720,000 $1,440,000 -$840,000 $210,000 $336,000 $294,000 $21,000 -$210,000 $63,000 $126,000 -$21,000 $5,250 $8,400 $7,350 Budgeted Overhead Costs Allocation Allocation of Is Costs (Ratio of 10: 30: 60) Allocation of AS Costs (Ratio of 25:40:35) Allocation of IS Costs (Ratio of 10:30: 60) Allocation of AS Costs (Ratio of 25:40:35) Allocation of IS Costs (Ratio of 10:30: 60) Allocation of AS Costs (Ratio of 25:40:35) Allocation of IS Costs (Ratio of 10:30: 60) Allocation of AS Costs (Ratio of 25:40:35) Allocation of Is Costs Total Budgeted overhead of Operating Department $525 $5,250 $1,575 $3,150 -$525 $131 $210 $184 $13 $131 $31 $9,885,231 $14,322,769 $24,208,000 Linear Equation Repeated Iterations GOVT $1,129,231 $1,129,231 CORP $1,870,769 $1,870,769 Preferable method If Support department costs are substantial it is better to use the reciprocal method since service department cost allocation is done to other service department also Direct method ignores the cost allocation to service department and allocates to operating departments directly Step method allocates the cost to one service department only. Service department which renders highest service cost is allocated first