Question

Optima Analytics Inc., provides advice on optimal production planning to small manufacturing firms. It has two types of advisers in its pay roll: Experts and Juniors. The company's cost system has two direct cost categories, namely the salaries and benefits of the two types of advisers.

The company's cost system also accumulates indirect costs into four distinct cost pools. These cost pools and the budgeted costs in these pools for 2017 are given below:

            Computing Support (CS)        $ 1,800,000

            Administrative Support (AS)        640,000

            Experts Support (ES)                    600,000 (E.g.,Experts-specific secretarial support costs)

            Juniors Support (JS)                      350,000 (E.g., Training costs for the Juniors)

The following table gives details on support expected to be provided by the first stage indirect cost pools (CS and AS) to other first stage indirect cost pools as well as the second stage pools. The second-stage pools (ES and JS) do not exchange services with each other.

	Allocation Base	CS	AS	ES	JS
CS	Server Storage TeraBytes	---	200	300	500
AS	Employees	10	---	54	36

Required: (The questions are independent)

1) Optima uses the step-down method to allocate the costs of CS and AS, in that order(i.e., CS first and AS next) to ES and JS. What will be the total support costs in the ES and JS pools, respectively, after the allocation of the costs of CS and AS to ES and JS is fully completed?

2) Denote the “true” costs of the computing and administrative support departments as CS and AS, respectively. Set up the two equations under the reciprocal method that can help calculate these “true” costs. You don’t have to solve them. Just set them up.

Answer 1

Optima Analytics Inc.
Answer 1- Step Method	CS	AS	ES	JS	Total
CS Server Storage- Terabytes		200.00	300.00	500.00	1,000.00
CS Server Storage- Terabytes %	0.00%	20.00%	30.00%	50.00%	100.00%
Budgeted costs	1,800,000.00	640,000.00	600,000.00	350,000.00	3,390,000.00
CS costs to be allocated	(1,800,000.00)	360,000.00	540,000.00	900,000.00	-
Total cost after allocation	-	1,000,000.00	1,140,000.00	1,250,000.00	3,390,000.00
AS Employees			54.00	36.00	90.00
AS Employees %			60.00%	40.00%	100.00%
AS costs to be allocated	-	(1,000,000.00)	600,000.00	400,000.00	-
Total cost after allocation	-	-	1,740,000.00	1,650,000.00	3,390,000.00
Answer 2- Reciprocal Method	CS	AS	ES	JS	Total
CS Server Storage- Terabytes	-	200.00	300.00	500.00	1,000.00
AS Employees	10.00	-	54.00	36.00	100.00
CS Server Storage- Terabytes %	0.00%	20.00%	30.00%	50.00%	100.00%
AS Employees %	10.00%	0.00%	54.00%	36.00%	100.00%
Let cost of CS cost is $ X and AS cost is $ Y
So, X= 1800000+ 10% of Y
Y= 640000+ 20% of X
Or, X= 1800000+ 0.10Y	Equation 1
Y= 640000+ 0.20X	Equation 2