Water Corp. has two principal operating departments, Installation (INS) and Engi
ID: 2426110 • Letter: W
Question
Water Corp. has two principal operating departments, Installation (INS) and Engineering (ENG), and two support departments, Human Resources (HR) and Accounting and Finance Services (AFS). The base used to allocate Human Resources is budgeted total operating hours. The base used to allocate Accounting and Finance Services is number of support hours. The Human Resources budget is $350,000, while the Accounting and Finance Services budget is $950,000. The following chart summarises budgeted amounts and allocation-base amounts used by each department: Determine which department's costs, based on the highest-percentage support concept, will be allocated first in the step-down method's sequence of allocation of service department costs (show all calculations). Using the step-down method, compute the amount of support costs to be allocated to each department. Construct a table that shows the total support costs for all departments after allocation using the step down method. Describe why the reciprocal method of allocating support department costs is conceptually superior to the direct and step-down methods.Explanation / Answer
1)
The 63% of the support services of HR department is provided to AFS department. Hence the HR department cost will be allocated first.
2 and 3)
Note: The AFS department cost has been approtioned to INS and ENG department in the ratio of 24000: 36000
4)
The reciprocal method is superior because it recognises the allocation of costs reciprocally in between the service departments thereby giving more accurate cost allocation of the service departments to the production departments. The percentage of allocation remains same and it is not required to change the basis of allocation as is required to be done in case of step method.
Total hours INS ENG HR AFS HR 8000 25% 13% 0% 63% AFS 62000 39% 58% 3% 0%Related Questions
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