Comparison of Allocation Methods
BluStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations follows:
Required
- a. Allocate the cost of the service departments to the operating departments using the direct method.
- b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration.
- c. Allocate the cost of the service departments to the operating departments using the reciprocal method.
- d. Comment on the results.
a.
Allocate the cost of the service departments to the operating departments by using the direct method.
Answer to Problem 55P
The cost allocation to domestic unit is $1,036,800 and international unit is $4,003,200.
Explanation of Solution
Direct method:
Direct cost allocates cost directly to the production process of the business. This method assumes that the service department does not provide services to each other. So does not allocate cost to the service department of the business. All the service costs are directly charged to the end consumer by the way of allocating the cost to the production department.
Allocate the cost to the operating department:
Department | ||||
Amount | Administration | Accounting | Domestic | International |
Department cost | $360,000 | $144,000 | $936,000 | $3,600,000 |
Administration (1) | $(360,000) | - | $72,000 | $288,000 |
Accounting (2) | - | $(144,000) | $28,800 | $115,200 |
Total cost | $0 | $0 | $1,036,800 | $4,003,200 |
Table: (1)
Thus, the cost allocation to the domestic unit is $1,036,800, and the international unit is $4,003,200.
Working note 1:
Calculate the allocation of maintenance cost:
Particulars |
Administration cost (a) |
Employees number (b) |
Amount |
Allocation to administration cost : | |||
Domestic | $360,000 | 45 | $72,000 |
International | $360,000 | 180 | $288,000 |
Total | $225 |
Table: (2)
Working note 2:
Calculate the allocation of accounting department:
Particulars |
Accounting cost (a) |
Transactions number (b) |
Amount |
Allocation to accounting cost : | |||
Domestic | $144,000 | 20,000 | $28,800 |
International | $144,000 | 80,000 | $115,200 |
Total | 100,000 |
Table: (3)
b.
Allocate the cost of the service departments to the operating departments by using the step method by starting with the Administration.
Answer to Problem 55P
The cost allocation to domestic unit is $1,036,800 and international unit is $4,003,200.
Explanation of Solution
Step method:
Step method allows the allocation of the cost to the production department and service departments. Unlike the direct method, it also allocates the cost of the service to various service departments. Allocation of the cost starts from the department that has provided the highest proposition of service to the department that has provided the least service. Step method allows only one-way allocation of cost among service departments.
Allocate the cost to the operating department:
Department | ||||
Particulars | Administration | Accounting | Domestic | International |
Department cost | $360,000 | $144,000 | $936,000 | $3,600,000 |
Administration (1) | $(360,000) | $36,000 | $64,800 | $259,200 |
Accounting (2) | - | $(180,000) | $36,000 | $144,000 |
Total cost | $0 | $0 | $1,036,800 | $4,003,200 |
Table: (4)
Thus, the cost allocation to the domestic unit is $1,036,800, and the international unit is $4,003,200.
Working note 3:
Calculate the allocation of maintenance cost:
Particulars |
Administration cost (a) |
Employees number (b) |
Amount |
Allocation to administration cost : | |||
Accounting | $360,000 | 25 | $36,000 |
Domestic | $360,000 | 45 | $64,800 |
International | $360,000 | 180 | $259,200 |
Total | $250 |
Table: (5)
Working note 4:
Calculate the allocation of accounting department:
Particulars |
Accounting cost (a) |
Transactions number (b) |
Amount |
Allocation to accounting cost : | |||
Domestic | $180,000 | 20,000 | $36,000 |
International | $180,000 | 80,000 | $144,000 |
Total | 100,000 |
Table: (6)
c.
Allocate the cost of the service departments to the operating departments by using the reciprocal method.
Answer to Problem 55P
The cost allocation to domestic unit is $1,036,800 and international unit is $4,003,200.
Explanation of Solution
Reciprocal method:
The reciprocal method recognizes the cost allocation to the service departments like step method. It allocates cost to the service department and production department of the business. Unlike the step method, the reciprocal method allows the two-way allocation of cost among the service department
Allocate the cost to the operating department:
Department | ||||
Amount | Administration | Accounting | Domestic | International |
Department cost | $360,000 | $144,000 | $936,000 | $3,600,000 |
Administration (1) | $(396,735) | $39,674 | $71,412 | $285,649 |
Accounting (2) | $36,735 | $(183,674) | $29,388 | $117,551 |
Total cost | $0 | $0 | $1,036,800 | $4,003,200 |
Table: (7)
Thus, the cost allocation to the domestic unit is $1,036,800, and the international unit is $4,003,200.
Working note 5:
Calculate the allocation of maintenance cost:
Particulars |
Administration cost (a) |
Employees number (b) |
Amount |
Allocation to administration cost : | |||
Accounting | $396,735 | 25 | $39,674 |
Domestic | $396,735 | 45 | $71,412 |
International | $396,735 | 180 | $285,649 |
Total | $250 |
Table: (8)
Working note 6:
Calculate the allocation of accounting department:
Particulars |
Accounting cost (a) |
Transactions number (b) |
Amount |
Allocation to accounting cost : | |||
Administration | $183,674 | 25,000 | $36,735 |
Domestic | $183,674 | 20,000 | $29,388 |
International | $183,674 | 80,000 | $117,551 |
Total | $125,000 |
Table: (9)
Working note 7:
Calculate the value of accounting and administration cost;
Set up a cost equation:
Let,
Administration cost: S1
Accounting cost: S2
Total service cos will be equal to the direct cost of the service department and cost allocated to the service department.
Putting the value of S1 in S2:
Calculate the value of S1:
Thus, administration costs and accounting costs are $396,735 and $183,637 respectively.
d.
Comment on the results.
Explanation of Solution
Comment on the cost allocation:
The allocation of the cost may differ, but the total allocated cost to the domestic and international department is the same.
So selecting a method will not result in the financial management of the business. The cost allocation will help the divisional manager to manage the cost of the division for the better performance of the division.
Want to see more full solutions like this?
Chapter 11 Solutions
Fundamentals Of Cost Accounting (6th Edition)
- The Bramble Company makes wheels and wings for ground transport vehicles and drones. In addition to the key manufacturing departments, Bramble needs two key support services, provided by its Maintenance and IT departments. The Maintenance costs are allocated to other departments based on the square footage of space each department occupies. The IT department allocates its costs to other departments based on the amount of time the IT employees spend assisting the other departments. The cost information of all four departments, along with their usage information for both allocation bases, is as follows. Initial cost Square feet occupied IT labor hours used Support Departments Maintenance IT $120.000 $74.000 1,100 1.800 1,100 Operating Departments Wheels $396,000 2,160 2,280 Wings $700,000 5,040 h 1.720 Totals $1,290,000 10,100 5,100arrow_forwardThe step-down allocation method: a. recognizes the total amount of services that support departments provide to each other b. allocates complete reciprocated costs c. typically begins with the support department that provides the highest percentage of its total services to other support departments d. offers key input for outsourcing decisionsarrow_forwardQ. Allocate the service department costs to the two operating departments using(i) the step-down method (Allocate Administrative Services first)(ii) the step-down method (Allocate Maintenance Services first)arrow_forward
- Allocate indirect costs to the three divisions using each of the three allocation bases suggested. For each allocation base, calculate division operating margins after allocations, in dollars and as a percentage of revenues.arrow_forwardIn each blank next to the following types of indirect expenses and service department expenses, place the identifying letter of the best allocation basis to use to distribute it to the departments indicated. 1. Computer service expenses of production scheduling for operating departments. 2. General office department expenses of the operating departments. 3. Maintenance department expenses of the operating departments. 4. Electric utility expenses of all departments. A. Relative number of employees. B. Proportion of total time in each department for maintenance. C. Proportion of floor space occupied by each department. D. Proportion of total processing time for each operating department.arrow_forwardRequired: Rank the support departments based on the percentage of their services provided to other support departments. Use this ranking to allocate the support departments’ costs to the operating departments based on the step-down method.arrow_forward
- Allocate the two support departments’ costs to the two operating departments using the Direct methodarrow_forwardCompute the total overhead costs of the operating departments (Retail Shops and Online Shop) after the service department costs of Admin and HR have been allocated using the direct method the step-down (using the sequence of cost of service provided) the reciprocal method (b)Which method would you recommend that the company use to allocate service department costs? Why? You should consider different perspectives.arrow_forwardPlease show your computations through excel. c. Compute the total service cost allocated to cutting department using RECIPROCAL method.arrow_forward
- 18. Which of the following would be an appropriate allocation base for support department costs associated with an accounting department? a. Number of accounting transactions processed b. Number of purchase requisitions prepared c. Square footage of the office space occupied by accounting d. Number of units of product soldarrow_forwardS1 - After service department costs are allocated to other departments, costs are re-circulated back to that service department, under the step method. S2 - When using the direct method of allocating service department costs, it is necessary that the cost of the service department which serves the greatest number of departments is allocated first. a. Only S1 is true b. Only S2 is true c. Both S1 & S2 are true d. Both S1 & S2 are falsearrow_forwardRank the support departments based on the percentage of their services provided to other support departments. Use this ranking to allocate the support departments’ costs to the operating departments based on the step-down method.arrow_forward
- Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Managerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College PubCollege Accounting, Chapters 1-27AccountingISBN:9781337794756Author:HEINTZ, James A.Publisher:Cengage Learning,