Question

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.

	Administration			Accounting			Domestic			International
Employees		–			24			44			32
Transactions		32,000			–			24,000			96,000
Department direct costs	$	354,000		$	148,000		$	940,000		$	3,710,000

Required:
a. Allocate the cost of the service departments to the operating departments using the reciprocal method.

	To
From	Administration	Accounting	Domestic	International
Department costs
Administration allocation
Accounting allocation
Total cost

Answer 1

Solution: Allocation of cost using reciprocal method

	Administration		Accounting
	No. of employees	% total	Transactions	% total
Administration	-	-	32,000	21.05%
Accounting	24	24%	-	-
Domestic	44	44%	24,000	15.79%
International	32	32%	96,000	63.16%
	100		152,000

Total service department cost = Direct costs of the service department + Cost allocation of the service department

S1 (Administration) = $354,000 + 21.05% S2

S2 (Accounting) = $148,000 + 24% S1

Substituting the first equation into the second equation

S2 = $148,000 + 24% ($354,000 + 21.05% S2)

S2 = $148,000 + $84,960 + 0.05052 S2

S2 - 0.05052 S2 = $232,960

0.94948 S2 = $232,960

S2 = $245,355

S1 = $354,000 + 21.05% * $245,355

= $354,000 + $51,647 = $405,647

From/To	Administration	Accounting	Domestic	International
Department costs	$354,000	$148,000	$940,000	$3,710,000
Administration Allocation	-$405,647	$97,355	$178,485	$129,807
Accounting Allocation	$51,647	-$245,355	$38,742	$154,966
Total Cost	-	-	$1,157,227	$3,994,773

_{Please rate positive and comment in case of any doubt. I would be happy to help you further.}