Question

Support Department Cost Allocation—Reciprocal Services Method

Blue Africa Inc. produces laptops and desktop computers. The company’s production activities mainly occur in what the company calls its Laser and Forming departments. The Cafeteria and Security departments support the company’s production activities and allocate costs based on the number of employees and square feet, respectively. The total cost of the Security Department is $267,000. The total cost of the Cafeteria Department is $240,000. The number of employees and the square footage in each department are as follows:

	Employees		Square Feet
Security Department	10		550
Cafeteria Department	26		2,400
Laser Department	40		4,800
Forming Department	50		800

Using the reciprocal services method of support department cost allocation, determine the total costs from the Security Department that should be allocated to the Cafeteria Department and to each of the production departments.

	Cafeteria Department		Laser Department		Forming Department
Security Department cost allocation	$		$		$

Answer 1

Answer:

	Cafeteria Department	Laser Department	Forming Department
Security Department cost allocation	$90,000	$180,000	$30,000

Explanation:

Step 1: Set up a system of equations for each of the service departments

.

SD = $267,000 + .1(CD)

CD = $240,000 + .3(SD)

SD = $267,000 + .1[$240,000 + .3(SD)]

SD = $267,000 + $24,000 + .03(SD)

1SD - .03(SD) = $291,000

.97 SD = $291,000

SD = $300,000

Step 2: Cost Allocation

	Security department	Cafeteria department	Laser department	Forming Department	Total
Calculation	(300,000)	300,000 × (2400÷8000)	300,000 × (4800÷8000)	300,000 × (800÷8000)
Alocated cost	0	$90,000	$180,000	$30,000	$300,000