Departmental Cost Allocation; Outsourcing
Tanner Company produces two software products (NetA and NetB) in two separate departments (A and B). These products are highly regarded network maintenance programs. NetA is used for small networks and NetB is used for large networks. Williams is known for the quality of its products and its ability to meet dates promised for software upgrades.
Department A produces NetA, and department B produces NetB. The production departments are supported by two support departments, systems design and programming services. The source and use of the support department time are summarized as follows:
| To |
| |||
From | Design | Programming | Department A | Department B | Total Labor-Hours |
Design | — | 4,000 | 2,000 | 10,000 | 16,000 |
Programming | 400 | — | 400 | 800 | 1,600 |
The costs in the two service departments are as follows:
| Design | Programming |
Labor and materials (all variable) | $30,000 | $25,000 |
Depreciation and other fixed costs | 38,000 | 29,000 |
Total | $68,000 | $54,000 |
Required
1. What are the costs allocated to the two production departments using (a) the direct method, (b) the step method with the sourcing department going first, and (c) the reciprocal method?
2. What are the total costs in the production departments after allocation?
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