Question

Cooper Ltd. has 2 operating divisions: domestic sales and international sales. They also have 2 support divisions: accounting support and human resources support. For the past year, Cooper’s cost records show the following information:

	Support Divisions		Operating Divisions
	Account’g Support	Human Resources Support	Domestic Sales	Inter-national Sales	Total
Budgeted costs incurred before any interdivision cost allocations	$500,000	$600,000	$8,400,000	$7,500,000	$ 17,000,000
Support work supplied by Accounting (based on # of employees)		20%	40%	40%	100%
Support work supplied by Human Resources (based on # of staffing actions)	10%		60%	30%	100%

Required:

1. Allocate the 2 support divisions’ costs to the operating divisions using the Direct Method.
2. Allocate the 2 support divisions’ costs to the operating divisions using the Reciprocal Method.
3. Allocate the 2 support divisions’ costs to the operating divisions using the Step Down Method – Allocate Accounting Support first.
4. What method do you recommend and why?

Cooper Ltd. would like to share the services of a consultant with another company, Hofstadter Inc. The consultant will work a total of 1,000 hours for both companies: 700 for Cooper and 300 hours for Hofstadter Inc. The total cost of the contract will be $368,000. If Cooper were to contract directly with the consultant for 700 hours, the cost would have been $350,000. If Hofstadter were to contract directly with the consultant, the contract would have cost them $ 150,000. How should the companies divide up the cost of the consultant?

Answer 1

Part (a)
	Support Divisions		Operating Divisions
	Account’g Support	Human Resources Support	Domestic Sales	Inter-national Sales	Total
Departmental cost before allocation	$500,000	$600,000	$8,400,000	$7,500,000	$17,000,000
Allocations
Accounts Depatment cost - equally given to each operartion depatments '- i.e. 1/2 , 1/2	($500,000)		$250,000	$250,000
HR Departemnt cost '- 6/9, 3/9		($600,000)	$400,000	$200,000

*Department Accounts’s cost has been allocated on the basis of no of employees:

40%+ 40% = 80%.

i.e ½ , ½

Allocated to department Domestic: $500,000 × (1/2) = $250,000
Allocated to department International : $500,000 × (1/2) = $250,000

**Department HR cost has been allocated on the basis of STAFFING ACTION:

60 + 30

    90

Allocated to department Domestic: $600,000 × (6/9) = $400,000
Allocated to department International : $600,000 × (3/9) = $200,000

Answere Part (b)

in image formate Ans (c)

Sr.no.		Support Divisions		Operating Divisions
1		Account’g Support	Human Resources Support	Domestic Sales	Inter-national Sales
2	Departmental cost before allocation	$500,000	$600,000	$8,400,000	$7,500,000
3	Allocations
4	Accounts Depatment cost - equally given to each operartion depatments '- i.e. 1/2 , 1/2	($500,000)	$100,000	$200,000	$200,000
5	Total	$0.00	$700,000.00	$8,600,000.00	$7,700,000.00
6	HR Departemnt cost '- 6/9, 3/9	$0.00	($700,000)	$466,666.67	$233,333.33
7	Total = 5+6		$0.00	$9,066,666.67	$7,933,333.33

Answere (d)

I Will always recommend Reciprocal method because  the direct method completely ignores the interdepartmental services and step method gives them only a partial recognition because it allocates costs forward – never backward.

To overcome for the same, Reciprocal is the best.