Question

Rundle Information Services, Inc., has two service departments: human resources and billing. Rundle's operating departments, organized according to the special industry each department serves, are health care, retail, and legal services. The billing department supports only the three operating departments, but the human resources department supports all operating departments and the billing department. Other relevant information follows. Number of employees Annual cost Annual revenue Human Resources 20 $900,000 Billing 50 $1,910,000 Health Care 201 $ 6,110,000 $10,100,000 Retail 151 $4,910,000 $5,650,000 Legal Services 98 $2,910,000 $4,250,000 *This is the operating cost before allocating service department costs. Required a. Allocate service department costs to operating departments, assuming that Rundle adopts the step method. The company uses the number of employees as the base for allocating human resources department costs and department annual revenue as the base for allocating the billing department costs. b. Allocate service department costs to operating departments, assuming that Rundle adopts the direct method. The company uses the number of employees as the base for allocating the human resources department costs and department annual revenue as the base for allocating the billing department costs. c. Compute the total allocated cost of service centers for each operating department using each allocation method.

Answer 1

Answer:

Using Step Distribution

Department	Human Resources	+	Billing	=	Allocated Cost
Healthcare	$361,800	+	$1,010,000	=	$1,371,800
Retail	$271,800	+	$565,000	=	$836,800
Legal Services	$176,400	+	$425,000	=	$601,400
					$2,810,000

Using Direct Method

Department	Human Resources	+	Billing	=	Allocated Cost
Healthcare	$402,000	+	$964,550	=	$1,366,550
Retail	$302,000	+	$539,575	=	$841,575
Legal Services	$196,000	+	$405,875	=	$601,875
					$2,810,000

Working:

Answer Using Step Distribution Method Under step distribution method firstly Human resources cost will be distributed as it serves all the other departments and after that cost of billing will be distributed Human resource cost will be allocated in ratio of number of employees i.e 50:201:151:98 Billing cost will be allocated on the basis of revenue i.e 1010:565:425 Human Resources Billing Healthcare Retail Legal Services $900,000 $1,910,000 $6,110,000 $4,910,000 $2,910,000 Annual Cost ($900,000) $90,000 $361,800 $271,800 $176,400 Human resource (50:201:151:98) ($2,000,000) $1,010,000 $565,000 $425,000 Billing Cost (1010:565:425) $0 $0 $7,481,800 $5,746,800 $3,511,400 + = + = Department Healthcare Retail Legal Services Human Resources $361,800 $271,800 $176,400 Billing $1,010,000 $565,000 $425,000 + = Allocated Cost $1,371,800 $836,800 $601,400 $2,810,000 + Using Direct Method Under direct method service department cost will be directly allocated to operating depart- ments without distributing to other service departments Human resource cost will be allocated in ratio of number of employees i.e 201:151:98 Billing cost will be allocated on the basis of revenue i.e 1010:565:425 Human Resources Billing Healthcare $900,000 $1,910,000 $6,110,000 Retail Legal Services $4,910,000 $2,910,000 Annual Cost ($900,000) $402,000 $302,000 $196,000 Human resource (50:201:151:98) ($1,910,000) $964,550 $539,575 $405,875 Billing Cost (1010:565:425) $0 $0 $7,476,550 $5,751,575 $3,511,875 + + Department Healthcare Retail Legal Services Human Resources $402,000 $302,000 $196,000 Billing $964,550 $539,575 $405,875 + Allocated Cost $1,366,550 $841,575 $601,875 $2,810,000 +