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2       Fahd Compagny is allocating support department costs to operating departments.            Actual support costs and...

2       Fahd Compagny is allocating support department costs to operating departments.

           Actual support costs and allocation base information for the two support departments is shown below.

             The costs of support department S1 are allocated based on the number of service calls made, and the costs of support department S2 are allocated based on square feet.

                                      Support Departments              Operating Departments

                                        S1                    S2                    O1                   O2

Support costs              $80,000           $28,000                   ----                   ----

Allocation bases:                                                                                            

Service calls                     2                      4                    10                      5

Square feet               6,000               3,000             23,000             18,000

            Using the reciprocal method:

a.   Determine the equations related to the reciprocal exchange of service between S1 and S2 costs

b.   Determine the amount of cost allocated from S2 to S1

c.   Determine the amount of cost allocated from S1 to O2

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Answer #1

Solution a.:

Equation Related to Reciprocal Exchange of Services between S1 and S2:

S1 cost = Direct cost + Allocated cost from S2

S1 cost = $80000 + [6000/(6000+23000+18000)] * S2 Cost

S1 Cost = $80000 + (6000/47000) *S2 Cost

S1 Cost = $80000 + 0.1276595 * S2 Cost

S2 Cost = Direct Cost + allocated cost from S1

S2 Cost = $28000 + [4/(4+10+5)] * S1 Cost

S2 Cost =$28000 + (4/19)* S1 Cost

Solution b:

As determined above, S1 Cost = $80000 + 0.1276595 * S2 Cost

S1 Cost = $80000 + 0.1276595 * [$28000 + (4/19)* S1 Cost]

S1 cost = $80000 + 3574.47 + 0.0268756 * S1 Cost

S1 Cost = $83574.47 / 0.9731244

S1 Cost = $85882.62

Therefore Allocated Cost From S2 to S1 = $85882.62 - $80000 = $5882.62

Solution c:

S1 Cost = $85882.62

Cost allocation from S1 to O2 = S1 cost * 5 / (4+10+5)

= $85882.62 *5/19 = $22600.68

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