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		–			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 direct method.

	To
From	Administration	Accounting	Domestic	International
Department costs
Administration allocation
Accounting allocation
Total cost	$0	$0	$0	$0

b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration.

	To
From	Administration	Accounting	Domestic	International
Department costs
Administration allocation
Accounting allocation
Total cost	$0	$0	$0	$0

c. 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	$0	$0	$0	$0

Answer 1

a. Direct method:

	To
From	Administration	Accounting	Domestic	International
Department costs	354000	148000	940000	3710000
Administration allocation	-354000	0	204947	149053
Accounting allocation	0	-148000	29600	118400
Total cost	0	0	1174547	3977453

b. Step-down method:

	To
From	Administration	Accounting	Domestic	International
Department costs	354000	148000	940000	3710000
Administration allocation	-354000	84960	155760	113280
Accounting allocation	0	-232960	46592	186368
Total cost	0	0	1142352	4009648

c. Reciprocal method:

	To
From	Administration	Accounting	Domestic	International
Department costs	354000	148000	940000	3710000
Administration allocation	-405518	97324	178428	129766
Accounting allocation	51518	-245324	38735	154941
Total cost	0	0	1157163	3994707

Working:

Assume Administration department costs to be 'AD' and Accounting department costs to be 'AC'

AD = 354000 + 0.21AC

AC = 148000 + 0.24AD

AD = 354000 + 0.21[148000 + (0.24AD)]

AD = 354000 + 31080 + 0.0504AD

0.9496AD = 385080

AD = 385080/0.9496 = 405518

AC = 148000 + (0.24 x 405518)

AC = 148000 + 97324 = 245324

Note: Kindly round off as required since no instructions have been provided with the question regarding rounding off. Any different rounding off may cause the answers to vary. For any clarifications, write under comments.