15-19 Support-department cost allocation; direct and step-down methods. Phoenix

Question

15-19 Support-department cost allocation; direct and step-down methods.

Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support departments—administrative services (AS) and information systems (IS)—and two operating departments—government consulting (GOVT) and corporate consulting (CORP). For the first quarter of 2017, Phoenix’s cost records indicate the following:

Support Operating

AS IS GOVT CORP Total

Budgeted overhead costs before any

interdepartmental cost allocations $600,000 $2,400,000 $8,756,000 $12,452,000 $24,208,000

Support work supplied AS (budgeted head count) 25% 40% 35% 100%

Support work supplied by IS (budgeted computer time) 10% 30% 60% 100%

1.) Allocate the two support departments' costs to the two operating departments using the following methods:

A. Direct Method

B. Step- down method (Allocate AS first)

C. Step-down method (Allocate IS first)

SHOW ALL WORK

Explanation / Answer

1.)

A. Direct Method

B. Step down method (Allocate AS first)

C. Step down method (allocate IS first)

AS ($) IS ($) GOVT ($) CORP ($) Budgeted overhead cost 600,000 2,400,000 Allocate of AS costs (40/75,35/75) (600,000) 320,000 280,000 Allocate of IS costs (30/90,60/90) (2,400,000) 800,000 1,600,000 Total $0 $0 $1,120,000 $1,880,000

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