resources and I-books, an online book retailer, has two operating departments-co

Question

resources and I-books, an online book retailer, has two operating departments-corporate sales and consumer sales-and two support departments human resources and information systems. Each sales department conducts merchandising and marketing operations independently. I- books uses number of employees to allocate human resources costs and processing time to allocate information systems costs. The controller of I-books reads a widely used textbook that states that "the reciprocal method is conceptually the most defensible." He seeks your assistance. The following data are available for September 2013: e defensble e sekon systems costs. EB (Click the icon to view the data.) (Click the icon to view the direct allocation data.) (Click the icon to view the step-down allocation data.) Requirements 1. Describe the key features of the reciprocal method 2. Allocate the support departments' costs (human resources and information systems) to the two operating departments using the reciprocal method 3. In the case presented in this exercise, which method (direct, step-down, or reciprocal) would you recommend? Why? Requirement 1. Describe the key features of the reciprocal method. The reciprocal allocation method explicitly includes the mutual services provided fully incorporated into the support department cost allocations. ! liierdepartmentai relationships .Interdepartmental relationships

Explanation / Answer

1. Key features of reciprocal method:

The reciprocal method allocation method explicitly includes the mutual services provided among all support departments. Interdepartmental relationships are fully incorporated into the support department cost allocations.

2. Percentage of services rendered by Human Resource department to Information system department =

20/ (20+50+30) = 20%

Percentage of services rendered by Information system department to Human Resource department =

375 /(375+2700+675) = 10%

Let HR be the total cost of Human Resources department and IS be the total cost of Information Systems.

HR = 75000+ 0.2IS

IS = 230000 +0.1HR

Solving simultaneously both equations:

HR = 75000 + 0.2 * (230000 +0.1HR)

HR= 75000+ 46000 + 0.02 HR

0.98 HR = 121000

HR = 123470 (rounded off)

IS = 242350

3. I would recommend reciprocal method since it is more accurate where service departments render services amongst themselves.

Operating Departments Corporate Sales Consumer Sales Human Resources 61735 37041 [123470 *50/100] [123470 *30/100] Information Systems 174492 43623 [242350*2700/3750] [242350*675/3750]

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