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 $265,000. The total cost of the Cafeteria Department is $551,000. The number of employees and the square footage in each department are as follows:

	Employees		Square Feet
Security Department	10		540
Cafeteria Department	24		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:

Total cost to be allocated from Security Department (S):

Total costs of Security Department include 10 ÷ (10 + 40 + 50) = 10% of Cafeteria Department costs

Thus, S = $265000 + (0.1 × C)

Total cost to be allocated from Cafeteria Department (C):

Total costs of Cafeteria Department include 2,400 ÷ (2,400 + 4,800 + 800) = 0.3 of Security Department costs

Thus, C = $551000 + ( 0.3 × S)

Substitute the equation for C into the S equation:

S = $265000 + {0.1 × [$551000 + (0.3 × S)]}

S = $265000 + $55100 + (0.03 × S)

0.97 × S = $320100

S = $330,000

Security Department cost allocation:

Cafeteria Department:	2,400 ÷ (2,400 + 4,800 + 800) = 30%
	30% × $330,000 = $99,000
Laser Department:	4,800 ÷ (2,400 + 4,800 + 800) = 60%
	60% × $330,000 = $198000
Forming Department:	800 ÷ (2,400 + 4,800 + 800) = 10%
	10% × $330,000 = 33,000