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3004 Assignment 1 Model Answer

This document provides three methods for allocating overhead costs across departments: direct, step-down, and reciprocal. The direct method allocates costs directly without reallocation. The step-down method reallocates support department costs based on service percentages. The reciprocal method uses equations to iteratively reallocate costs between support departments based on the services each provides the other. The reciprocal method is considered the most accurate as it recognizes the reciprocal services between departments.

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Ali Harb
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38 views3 pages

3004 Assignment 1 Model Answer

This document provides three methods for allocating overhead costs across departments: direct, step-down, and reciprocal. The direct method allocates costs directly without reallocation. The step-down method reallocates support department costs based on service percentages. The reciprocal method uses equations to iteratively reallocate costs between support departments based on the services each provides the other. The reciprocal method is considered the most accurate as it recognizes the reciprocal services between departments.

Uploaded by

Ali Harb
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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100

Assignment 1 Model Answer

1. The Direct Method:


25
AS IS GOVT CORP
overhead costs before allocation $600,000 $2,400,000 $8,756,000 $12,452,000
Alloc. of AS costs
(40/75, 35/75) (600,000) $ 320,000 $ 280,000
Alloc. of IS costs
(30/90, 60/90) (2,400,000) 800,000 1,600,000
Total overhead allocated $ 0 $ 0 $9,876,000 $14,332,000

2. The Step-down Method (AS first):


25
Allocate support departments on a ranking of the percentage of their total services provided to other
support departments.
1. Administrative Services 25%
2. Information Systems 10%

AS IS GOVT CORP
overhead costs before allocation $600,000 $2,400,000 $8,756,000 $12,452,000
Alloc. of AS costs
(0.25, 0.40, 0.35) (600,000) 150,000 $ 240,000 $ 210,000
Alloc. of IS costs
(30/90, 60/90) (2,550,000) 850,000 1,700,000
$ 0 $ 0 $9,846,000 $14,362,000
3. The Reciprocal Method: 40

a. Using equations (20 marks)

Reciprocal Method Computation


AS = $600,000 + 0.10 IS
IS = $2,400,000 + 0.25AS
IS = $2,400,000 + 0.25 ($600,000 + 0.10 IS)
= $2,400,000 + $150,000 + 0.025 IS
0.975IS = $2,550,000
IS = $2,550,000 ÷ 0.975
= $2,615,385
AS = $600,000 + 0.10 ($2,615,385)
= $600,000 + $261,538
= $861,538

Support Departments Operating Departments


AS IS Govt. Corp.
Costs $600,000 $2,400,000 $8,756,000 $12,452,000
Alloc. of AS costs
(0.25, 0.40, 0.35) (861,538) 215,385 $ 344,615 $ 301,538
Alloc. of IS costs
(0.10, 0.30, 0.60) 261,538 (2,615,385) 784,616 1,569,231
$ 0 $ 0 $9,885,231 $14,322,769

b. Using repeated iterations (20 marks)

Support Departments Operating Departments


AS IS Govt. Corp.
Costs $600,000 $2,400,000 $8,756,000 $12,452,000
1st Allocation of AS
(0.25, 0.40, 0.35) (600,000) 150,000 $ 240,000 $ 210,000
2,550,000
1st Allocation of IS
(0.10, 0.30, 0.60) 255,000 (2,550,000) 765,000 1,530,000
2nd Allocation of AS
(0.25, 0.40, 0.35) (255,000) 63,750 102,000 89,250
2nd Allocation of IS
(0.10, 0.30, 0.60) 6,375 (63,750) 19,125 38,250
3rd Allocation of AS
(0.25, 0.40, 0.35) (6,375) 1,594 2,550 2,231
3rd Allocation of IS
(0.10, 0.30, 0.60) 160 (1,594) 478 956
4th Allocation of AS
(0.25, 0.40, 0.35) (160) 40 64 56
4th Allocation of IS
(0.10, 0.30, 0.60) 4 (40) 12 24
5th Allocation of AS
(0.25, 0.40, 0.35) (4) 1 2 1
5th Allocation of IS
(0.10, 0.30, 0.60) 0 (1) 0 1
Total allocation $ 0 $ 0 $9,885,231 $14,322,769

4. Compare differences between the three methods: 10

Govt. Consulting Corp. Consulting

a. Direct $9,876,000 $14,332,000

b. Step-Down (AS first) $9,846,000 $14,362,000

c. Reciprocal $9,885,231 $14,322,769

The three methods differ in the level of support department cost allocation across support departments.

The level of reciprocal service by support departments is material. Administrative Services supplies 25% of

its services to Information Systems. Information Systems supplies 10% of its services to Administrative

Services. The reciprocal method recognizes all the interactions and is thus the most accurate.

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