Q2 Fahd Compagny is allocating support department costs to operating departments

Question

Q2 Fahd Compagny is allocating support department costs to operating departments. Actual support costs and allocation base information for the two support departments is shown below. The costs of support department S1 are allocated based on the number of service calls made, and the costs of support department S2 are alecated based on square fet. Support Departments Operating Departments Sl S2 02 Support costs $80,000 S28,000 Allocation bases: Service calls 2 4105 Square feet6,0003,00023,000 18,000 Using the reciprocal method: a. Determine the equations related to the reciprocal b. Determine the amount of cost allocated from S2 to c. Determine the amount of cost allocated from S1 to exchange of service between S1 and S2 costs S1 02 Answer

Explanation / Answer

Solution a:

Support department cost = Direct Cost + Allocated Cost

S1 Cost = $80,000 + [6000 / (6000+23000+18000)]* S2 Cost

= $80,000 + 0.12766*S2 Cost

S2 Cost = $28,000 + [4 / (4+10+5)]* S1 Cost

= $28,000 + 0.21053 * S1 Cost

Solution b:

S2 Cost = $28,000 + 0.21053 * S1 Cost

= $28,000 + 0.21053 * ($80,000 + 0.12766*S2 Cost)

S2 Cost = $28,000 + $16,842 + 0.02687 * S2 Cost

S2 Cost = $46,080

S1 Cost = $80,000 + 0.12766*$46,080 = $85,883

Amount of cost allocated from S2 to S1 = $46,080 * 6000 / 47000 = $5,883

Solution c:

Cost allocated from S1 to O2 = $85,883 * 5/19 = $22,601

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