Question

15-34 Support-department cost allocations; single-department cost pools; direct, step-down, and reciprocal methods. Sportz, Inc., manufactures athletic shoes and athletic clothing for both amateur and professional athletes. The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows total costs for each manufacturing facility and for each support department. Information technology (IT) Human resources (HR) Clothing Shoes Total costs Variable Costs S 600 S 400 S2,500 $3,000 S6,500 Fixed Costs S 2,000 1,000 S 8,000 S 4,500 $15,500 Total Costs by Department (in thousands) $ 2,600 S 1,400 $10,500 S 7,500 $22,000 The total costs of the support departments (IT and HR) are allocated to the production departments (cloth- ing and shoes) using a single rate based on the following: Information technology Number of IT labor-hours worked by department Number of employees supported by department Human resources. Data on the bases, by department, are given as follows: Department Clothing Shoes Information technology Human resources IT Hours Used 5,040 3,960 Number of Employees 220 92 3,000 1. What are the total costs of the production departments (clothing and shoes) after the support depart- ment costs of information technology and human resources have been allocated using (a) the direct method, (b) the step-down method (allocate information technology first), (c) the step-down method (allocate human resources first), and (d) the reciprocal method? Assume that all of the work of the IT department could be outsourced to an independent company for $97.50 per hour. If Sportz no longer operated its own IT department, 30% of the fixed costs of the IT department could be eliminated. Should Sportz outsource its IT services? 2.

Answer 1

a	Direct method
IT department cost		2600
IT hours used(production department only)		(5040+3960)
Cost allocation
Cost allocated to Clothing=2600*5040/9000		1456
Cost allocated to Shoes=2600*3960/9000		1144
HR department cost		1400
IT hours used(production department only)		(220+88)
Cost allocation
Cost allocated to Clothing=1400*220/308		1000
Cost allocated to Shoes=2600*3960/9000		400

B	Step down method(IT Dept first)
	Clothing	Shoes	IT	HR
Cost	10,500.00	7,500.00	2,600.00	1,400.00
Allocation of IT department(X/12000*A)	1,092.00	858.00	(2,600.00)	650.00
Total	11,592.00	8,358.00	-	2,050.00
Allocation of HR department(X/308*A)	1,464.29	585.71		(2,050.00)
Total	13,056.29	8,943.71	-	-

C	Step down method(HR Dept first)
	Clothing	Shoes	IT	HR
Cost	10,500.00	7,500.00	2,600.00	1,400.00
Allocation of HR department(X/400*A)	770.00	308.00	322.00	(1,400.00)
Total	11,270.00	7,808.00	2,922.00	-
Allocation of IT department(X/9000*A)	1,636.32	1,285.68	(2,922.00)
Total	12,906.32	9,093.68	-	-

2.

2	IT department total hour			12000
	Current cost			2600
	Fixed cost to be reduced			600
	Variable cost to be eliminated			600
	Unavoidable cost			1400
	Cost of outsourcing(in thousands)			1170
	Total cost			2570
	Cost saving			30

Sports can outsource its IT department as there is a cost saving of 30,000

Answer 2

can anyone solve section D of this problem?? It is the reciprocal method??? It was not included in the answer.