Cost Management
Cost Management
8th Edition
ISBN: 9781259917028
Author: BLOCHER, Edward
Publisher: Mcgraw-hill Education,
Question
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Chapter 7, Problem 41P
To determine

Ascertain the cost allocated using each method of allocation.

Expert Solution & Answer
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Explanation of Solution

a) Direct method:

Compute the base for allocation:

Departmental Cost Allocation Bases
ParticularsInformation TechnologyOperationsClaims ProcessAdministrationSales
Information Technology 20%20%40%20%
Operations10% 10%50%30%
Total Amount$600,000$1,800,000$450,000$850,000$650,000

Table (1)

Compute the total costs allocated:

Information Technology
ParticularsClaims ProcessAdministrationSales
Service percentage20%40%20%
Allocation percentage25%50.00%25.00%
Allocation amount ($600,000)$150,000$300,000$150,000
Operations
ParticularsClaims ProcessAdministrationSales
Service percentage10%50%30%
Allocation percentage11.1111%55.5556%33.3333%
Allocation amount ($1,800,000)$200,000$1,000,001$599,999
ParticularsClaims ProcessAdministrationSales
Information Technology$150,000$300,000$150,000
Operations$200,000$1,000,001$599,999
Total Amount Allocated$350,000$1,300,001$749,999
ParticularsClaims ProcessAdministrationSales
First phase allocation$450,000$850,000$650,000
Information Technology$150,000$300,000$150,000
Operations$200,000$1,000,001$599,999
Total Amount Allocated$800,000$2,150,001$1,399,999

Table (2)

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

Compute the base for allocation:

Departmental Cost Allocation Bases
ParticularsInformation TechnologyOperationsClaims ProcessAdministrationSales
Information Technology 20%20%40%20%
Operations10% 10%50%30%
Total Amount$600,000$1,800,000$450,000$850,000$650,000

Table (3)

Compute the total costs allocated:

ParticularsOperationsClaims ProcessAdminist-rationSales
Service percentage20%20%40%20%
Allocation amount ($600,000)$120,000$120,000$240,000$120,000
Operations
ParticularsClaims ProcessAdminist-rationSales
Service percentage10%50%30%
Allocation percentage11.1111%55.5556%33.3333%
Allocation amount ($1,920,000)$213,333$1,066,668$639,999
ParticularsClaims ProcessAdminist-rationSales
First phase allocation$450,000$850,000$650,000
Information Technology$120,000$240,000$120,000
Operations$213,333$1,066,668$639,999
Total Amount Allocated$783,333$2,156,668$1,409,999

Table (4)

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

Compute the base for allocation:

Departmental Cost Allocation Bases
ParticularsInformation TechnologyOperationsClaims ProcessAdministrationSales
Information Technology 20%20%40%20%
Operations10% 10%50%30%
Total Amount$600,000$1,800,000$450,000$850,000$650,000

Table (5)

Compute the total costs allocated:

ParticularsOperationsClaims ProcessAdminist-rationSales
Service percentage10%10%50%30%
Allocation amount ($1,800,000)$180,000$180,000$900,000$540,000
Information Technology
ParticularsClaims ProcessAdminist-rationSales
Service percentage20%40%20%
Allocation percentage25%50.00%25.00%
Allocation amount ($780,000)$195,000$390,000$195,000
ParticularsClaims ProcessAdminist-rationSales
First phase allocation$450,000$850,000$650,000
Operations$180,000$900,000$540,000
Information Technology$195,000$390,000$195,000
Total Amount Allocated$825,000$2,140,000$1,385,000

Table (6)

c) Reciprocal method

Compute the base for allocation:

Departmental Cost Allocation Bases
ParticularsInformation TechnologyOperationsClaims ProcessAdministrationSales
Information Technology 20%20%40%20%
Operations10% 10%50%30%
Total Amount$600,000$1,800,000$450,000$850,000$650,000

Table (7)

Compute the total costs allocated:

Information Technology
ParticularsClaims ProcessAdministrationSales
Allocation percentage20%40%20%
Allocation amount ($795,918.37)$159,184$318,367$159,184
   
Operations
ParticularsClaims ProcessAdministrationSales
Allocation percentage10%50%30%
Allocation amount ($1,959,183.67)$195,918$979,592$587,755
ParticularsClaims ProcessAdministrationSales
First phase allocation$450,000$850,000$650,000
Information Technology$159,184$318,367$159,184
Operations$195,918$979,592$587,755
Total Amount Allocated$805,102$2,147,959$1,396,939

Table (8)

Compute the base for allocation:

Reciprocal Cost allocation Using Solver
ParticularsAllocated costsService rates toAllocation to
Information TechnologyOperationsInformation TechnologyOperations
Information Technology$795,918.371.00(0.20)$795,918($159,184)
Operations$1,959,183.67(0.10)1.00($195,918)$1,959,184
Total   $600,000$1,800,000

Table (9)

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Chapter 7 Solutions

Cost Management

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