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		–			28			52			20
Transactions		40,000			–			21,000			84,000
Department direct costs	$	359,000		$	142,000		$	950,000		$	3,750,000

Required:

a. Allocate the cost of the service departments to the operating departments using the direct method. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

c. Allocate the cost of the service departments to the operating departments using the reciprocal method. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)

Answer 1

a) Direct method:
	Administration	Accounting	Domestic	International
Department direct costs	$359,000	$142,000	$950,000	$3,750,000
Allocation of administration costs [$359,000*52/(52 + 20)]; [$359,000*20/[50+20])	($359,000)		$259,278	$99,722
Allocation of Accounting costs ($142,000*21,000/[21,000 + 84,000]); ($142,000*84,000/[21,000+84,000])		($142,000)	$28,400	$113,600
Total costs allocated	$0	$0	$1,237,678	$3,963,322
b) Step down method:
	Administration	Accounting	Domestic	International
Department direct costs	$359,000	$142,000	$950,000	$3,750,000
Allocation of administration costs [$359,000*28/(28+52+20)]; [$359,000*52/(28+52 + 20)]; [$359,000*20/[28+50+20])	($359,000)	$100,520	$186,680	$71,800
Allocation of accounting costs [$142,000+$100,520 = $242,520*21,000/(21,000+84,000)]; [$242,520*84,000/(21,000+84,000)]		($242,520)	$48,504	$194,016
Total costs allocated	$0	$0	$1,185,184	$4,015,816
c) Reciprocal method:
	Administration	Accounting	Domestic	International
Department direct costs	$359,000	$142,000	$950,000	$3,750,000
Allocation of administration costs ($432,682.29*28/100); ($432,682.29*52/100); ($432,682.29*20/100)	($432,682.29)	$121,151.04	$224,994.79	$86,536.49
Allocation of accounting costs ($263,151.04*40,000/145,000); ($263,151.04*21,000/145,000); ($263,151.04*84,000/145,000)	$72,593.39	($253,151.04)	$38,111.53	$146,653.02
Total costs allocated	$0	$0	$1,213,106	$3,983,190

Working notes:

Accounting = $142,000 + [28 / {28 + 52 + 20}] of Administration costs

Accounting = $142,000 + [28 / 100] of Administration costs

Accounting = $142,000 + 0.28 of Administration costs ---------- Equation 1

Administration = $359,000 + [40,000 / (40,000 + 21,000 + 84,000) of Accounting costs

Administration = $359,000 + [40,000 / 145,000] of Accounting costs

Administration = $359,000 + 0.2759 of Accounting costs ------------- Equation 2

Substituting equation 1 in equation 2:

Administration = $359,000 + 0.28 * ($142,000 + 0.2759 of Administration costs)

Administration = $359,000 + $39,760 + (0.28 * 0.2759 of Administration costs)

Administration = $398,760 + 0.077252 of Administration costs

Administration - 0.077252 of Administration costs = $398,760

0.922748 of Administration costs = $398,760

Administration costs = $398,760 / 0.922748

Administration costs = $432,682.29

Now, calculate the accounting costs:

Accounting = $142,000 + 0.28 of $432,682.29

Accounting = $142,000 + $121,151.04

Accounting = $263,151.04