Question

# BluStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International....

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

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

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