Question

i Data Table Bt ht SUPPORT OPERATING AS IS GOVT CORP Total no $ 600,000 $ 2,400,000 $ 8,756,000 $ 12,452,000 $ 24,208,000 no Budgeted overhead costs before any interdepartment cost allocations Support work supplied by AS (budgeted head count) Support work supplied by IS (budgeted computer time) 0 25% 40% 35% 100% ות 10% 0 30% 60% 100% Print Done

Answer 1

Support-department cost allocation, reciprocal method :-

1a.

Support Departments AS IS Operating Departments Govt. Corp. $600,000 $2,400,000 Costs Alloc. of AS costs (0.25, 0.40.0.35) Alloc. of IS costs (0.10.0.30, 0.60) (861,538) 215,385 $ 344.615 $ 301,538 261,538 (2.615,385) $ 0 784,616 $1.129.231 1.569,231 $1.870.769 $ 0

Reciprocal Method Computation   

AS = $600,000 + 0.10 IS

IS = $2,400,000 + 0.25AS

IS = $2,400,000 + 0.25 ($600,000 + 0.10 IS)

= $2,400,000 + $150,000 + 0.025 IS

0.975IS = $2,550,000

IS = $2,550,000 ÷ 0.975

= $2,615,385

AS = $600,000 + 0.10 ($2,615,385)

= $600,000 + $261,538

= $861,538

1b.

Support Departments AS IS $600,000 $2,400,000 Operating Departments Govt. Corp. Costs 1st Allocation of AS (0.25, 0.40, 0.35) (600,000) $ 240,000 $ 210,000 150,000 2,550,000 255,000 (2,550,000) 765,000 1,530,000 (255,000) 63,750 102,000 89,250 6,375 (63,750) 19,125 38,250 (6,375) 1,594 2,550 2,231 1st Allocation of IS (0.10.0.30, 0.60) 2nd Allocation of AS (0.25, 0.40, 0.35) 2nd Allocation of IS (0.10.0.30, 0.60) 3rd Allocation of AS (0.25, 0.40, 0.35) 3rd Allocation of IS (0.10.0.30, 0.60) 4th Allocation of AS (0.25, 0.40, 0.35) 4th Allocation of IS (0.10.0.30, 0.60) 5th Allocation of AS (0.25, 0.40, 0.35) 5th Allocation of IS (0.10.0.30, 0.60) Total allocation 160 (1,594) 478 956 (160) 40 64 56 4 (40) 12 24 (4) 1 2 1 0 (1) $ S $1,129,231 $1.870,769

2.

Govt. Consulting

Corp. Consulting

a. Direct $1,120,000 $1,880,000

b. Step-Down (AS first) 1,090,000 1,910,000

c. Step-Down (IS first) 1,168,000 1,832,080

d. Reciprocal (linear equations) 1,129,231 1,870,769

e. Reciprocal (repeated iterations) 1,129,231 1,870,769

The four methods differ in the level of support department cost allocation across support departments. The level of reciprocal service by support departments is material. Administrative Services supplies 25% of its services to Information Systems. Information Systems supplies 10% of its services to Administrative Services. The Information Department has a budget of $2,400,000 that is 400% higher than Administrative Services.

The reciprocal method recognizes all the interactions and is thus the most accurate. This is especially clear from looking at the repeated iterations calculations.