Chapter 7, Problem 39P

1.

To determine

Ascertain the cost allocated using each method of allocation.

Explanation of Solution

a) Direct method:

Compute the base for allocation:

Departmental Cost Allocation Bases
Particulars	Info systems	Facilities	Programming	Consult	Training
Info systems		$600	$1,200	$300	$900
		20%	40%	10%	30%
Facilities	$240		$960	$600	$600
	10%		40%	25%	25%
Total Amount	$80,000	$40,000	$160,000	$190,000	$125,000

Table (1)

Compute the total costs allocated:

Info systems
Particulars	Programming	Consult	Training
Service percentage	40%	10%	30%
Allocation percentage	50.00%	12.50%	37.50%
Allocation amount ($80,000)	$40,000	$10,000	$30,000
Facilities
Particulars	Programming	Consult	Training
Service percentage	40%	25%	25%
Allocation percentage	44.44%	27.78%	27.78%
Allocation amount ($40,000)	$17,776	$11,112	$11,112
Particulars	Programming	Consult	Training
Info systems	$40,000	$10,000	$30,000
Facilities	$17,776	$11,112	$11,112
Total Amount Allocated	$57,776	$21,112	$41,112
Particulars	Programming	Consult	Training
First phase allocation	$160,000	$190,000	$125,000
Info systems	$40,000	$10,000	$30,000
Facilities	$17,776	$11,112	$11,112
Total Amount Allocated	$217,776	$211,112	$166,112

Table (2)

b.1) Split-off method if info systems are split first:

Compute the base for allocation:

Departmental Cost Allocation Bases
Particulars	Info systems	Facilities	Programming	Consult	Training
Info systems		$600	$1,200	$300	$900
		20%	40%	10%	30%
Facilities	$240		$960	$600	$600
	10%		40%	25%	25%
Total Amount	$80,000	$40,000	$160,000	$190,000	$125,000

Table (3)

Compute the total costs allocated:

Particulars	Facilities	Programming	Consult	Training
Service percentage	20%	40%	10%	30%
Allocation amount ($80,000)	$16,000	$32,000	$8,000	$24,000
Facilities
Particulars	Programming	Consult	Training
Service percentage	40%	25%	25%
Allocation percentage	44.44%	27.78%	27.78%
Allocation amount ($56,000)	$24,886	$15,557	$15,557
Particulars	Programming	Consult	Training
Info systems	$32,000	$8,000	$24,000
Facilities	$24,886	$15,557	$15,557
Total Amount Allocated	$56,886	$23,557	$39,557
Particulars	Programming	Consult	Training
First phase allocation	$160,000	$190,000	$125,000
Info systems	$32,000	$8,000	$24,000
Facilities	$24,886	$15,557	$15,557
Total Amount Allocated	$216,886	$213,557	$164,557

Table (4)

b.2) Split-off method if info systems are split first:

Compute the base for allocation:

Departmental Cost Allocation Bases
Particulars	Info systems	Facilities	Programming	Consult	Training
Info systems		$600	$1,200	$300	$900
		20%	40%	10%	30%
Facilities	$240		$960	$600	$600
	10%		40%	25%	25%
Total Amount	$80,000	$40,000	$160,000	$190,000	$125,000

Table (5)

Compute the total costs allocated:

Particulars	Facilities	Programming	Consult	Training
Service percentage	10%	40%	25%	25%
Allocation amount ($40,000)	$4,000	$16,000	$10,000	$10,000
Info systems
Particulars	Programming	Consult	Training
Service percentage	40%	10%	30%
Allocation percentage	50.00%	12.50%	37.50%
Allocation amount ($84,000)	$42,000	$10,500	$31,500
Particulars	Programming	Consult	Training
Facilities	$16,000	$10,000	$10,000
Info systems	$42,000	$10,500	$31,500
Total Amount Allocated	$58,000	$20,500	$41,500
Particulars	Programming	Consult	Training
First phase allocation	$160,000	$190,000	$125,000
Facilities	$16,000	$10,000	$10,000
Info systems	$42,000	$10,500	$31,500
Total Amount Allocated	$218,000	$210,500	$166,500

Table (6)

c) Reciprocal method

Compute the base for allocation:

Departmental Cost Allocation Bases
Particulars	Info systems	Facilities	Programming	Consult	Training
Info systems		$600	$1,200	$300	$900
		20%	40%	10%	30%
Facilities	$240		$960	$600	$600
	10%		40%	25%	25%
Total Amount	$80,000	$40,000	$160,000	$190,000	$125,000

Table (7)

Compute the total costs allocated:

Info systems
Particulars	Programming	Consult	Training
Allocation percentage	40%	10%	30%
Allocation amount ($85,714.29)	$34,286	$8,571	$25,714
Facilities
Particulars	Programming	Consult	Training
Allocation percentage	40%	25%	25%
Allocation amount ($57,142.86)	$22,857	$14,286	$14,286
Particulars	Programming	Consult	Training
Info systems	$34,286	$8,571	$25,714
Facilities	$22,857	$14,286	$14,286
Total Amount Allocated	$57,143	$22,857	$40,000
Particulars	Programming	Consult	Training
First phase allocation	$160,000	$190,000	$125,000
Info systems	$34,286	$8,571	$25,714
Facilities	$22,857	$14,286	$14,286
Total Amount Allocated	$217,143	$212,857	$165,000

Table (8)

Compute the base for allocation:

Reciprocal Cost allocation Using Solver
Particulars	Allocated costs	Service rates to		Allocation to
		Info systems	Facilities	Info systems	Facilities
Info systems	$85,714.29	1.00	(0.20)	$85,714	($17,143)
Facilities	$57,142.86	(0.10)	1.00	($5,714)	$57,143
Total				$80,000	$40,000

Table (9)

2.

To determine

Ascertain the impact of the proposed plan and its overall impact.

Explanation of Solution

A new allocation base based on the floor space occupied, machine hours may provide a more similar value like the outside market cost. In such a case the market prices shall force a more competitive service department costs similar to the service costs of the outside suppliers.