Question

Problem 11-61 (Algo) Direct, Step, and Reciprocal Methods: Comparisons (LO 11-2, 3, 4) [The following information applies to the questions displayed below.] Gipps Business College (GBC) has two degree programs, undergraduate (UG) and graduate (GRAD) and three service departments, information technology (IT), Event Planning (EP), and Career Services (CS). The CFO of GBC is conducting a profitability analysis of the two programs and wants to include the appropriate costs of the service departments in the costs of the two degree programs. As a part of the analysis, the CFO has collected the following usage patterns of the service departments over the last two years. Supplying Using Department Department EP CS 10% 20% © 25% @ @ @ $84,000 $96,000 $118,000 IT @ IT EP CS Direct cost UG 40% 25% 60% TBD GRAD 30% 50% 40% TBD *To Be Determined Problem 11-61 (Algo) Part a Required: a. The CFO is unsure what the best way to allocate the cost is and has asked you for the allocations to the UG and GRAD programs using: 1. The direct method; 2. The step method starting with IT, followed by EP, and then CS; 3. The reciprocal method. (You do not need matrix algebra or to read the Appendix to complete this requirement.) Complete this question by entering your answers in the tabs below. Reg A1 Reg A2 Req A3 The CFO is unsure what the best way to allocate the cost is and has asked you for the allocations to the UG and GRAD programs using the direct method. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) EP UG GRAD S Department costs IT allocation EP allocation CS allocation IT CS 84,000 S 96,000 118,000 (84,000) (90,000) (118,000) 0 S 6,000 S 0 Total costs allocated S S 0 S Req A1 Req A2 >

Answer 1

Ans 1) Allocation of Costs based on Direct Method

Particulars	Allocation Ratio	IT	EP	CS	UG	GRAD
Department Costs...(A)		$84,000	$96,000	$118,000	$ -	$ -
IT Allocation..(B)	40:30	($84,000)	-	-	$48,000 ($84,000*40/70)	$36,000 ($84,000*30/70)
EP Allocation...(C)	25:50	-	($96,000)	-	$32,000 ($96,000*25/75)	$64,000 ($96,000*50/75)
CS Allocation...(D)	60:40	-	-	($118,000)	$70,800 ($118,000*60/100)	$47,200 ($118,000*40/100)
Total Cost Allocated...(E)=(A)+(B)+(C)=(D)		$0	$0	$0	$150,800	$147,200

Ans 2) Allocation of Costs Based on Step Method

Particulars	Allocation Ratio	IT	EP	CS	UG	GRAD
Department Costs...(A)		$84,000	$96,000	$118,000	$ -	$ -
IT Allocation...(B)	10:20:40:30	($84,000)	$8400 ($84,000*10/100)	$16,800 ($84,000*20/100)	$33,600 ($84,000*40/100)	$25,200 ($84,000*30/100)
Balance ...(C)=(A)+(B)		-	$104,400	$134,800	$33,600	$25,200
EP Allocation...(D)	0:25:25:50	-	($104,400)	$26,100 ($104,400*25/100)	$26,100 ($104,400*25/100)	$52,200 ($104,400*50/100)
Balance..(E)=(C)+(D)			-	$160,900	$59,700	$77,400
CS Allocation...(F)	0:0:60:40	-	-	($160,900)	$96,540 ($160,900*60/100)	$64,360 ($160,900*40/100)
Total Cost Allocated...(G)=(E)+(F)		$0	$0	$0	$156,240	$141,760

Ans 3) Allocation of Cost Based on Reciprocal Method

Let Total cost of IT, EP & CS be X,Y & Z

X= $84,000

Y= $96,000 + 10% of X = $96,000 + $ 8400($84,000*10%) = $104,400

Z = $118,000 + 20% of X + 25% of Y

= $118,000 + $16,800 ($84,000*20%) + $26,100 ($104,400*25%)

= $160,900

Particulars	Allocation Ratio	IT	EP	CS	UG	GRAD
Department Costs...(A)		$84,000	$96,000	$118,000	$ -	$ -
IT Allocation...(B)	10:20:40:30	($84,000) (X- Value Calculated above)	$8400 ($84,000*10/100)	$16,800 ($84,000*20/100)	$33,600 ($84,000*40/100)	$25,200 ($84,000*30/100)
EP Allocation...(C)	0:25:25:50	-	($104,400) (Y- Value Calculated above)	26,100 ($104,400*25/100)	$26,100 ($104,400*25/100)	$52,200 ($104,400*50/100)
CS Allocation...(D)	0:0:60:40	-	-	($160,900) (Z- Value Calculated above)	$96,540 ($160,900*60/100)	$64,360 ($160,900*40/100)
Total Cost Allocated...(E)=(A)+(B)=(C)+(D)		$0	$0	$0	$156,240	$141,760