epartments (domestic and world tours) after the support department costs of Admi

Question

epartments (domestic and world tours) after the support department costs of Administration and to Requirements What are the total overhead costs of the operating departments (domestic and world tours) after the support department costs of Administration and Information Technology have been allocated using (a) the direct method, (b) the step-down method (allocate Administration first), (c) the step-down method (allocate Information Technology first), and (d) the reciprocal method using the method of repeated iterations and linear equations? nd I d th epa Print Done

Explanation / Answer

Answer d-1. Reciprocal method - Linear Equations Express Support department budgeted costs and reciprocal relationships in the form of linear equations: Equation 1 - Admn. = $400,000 + 0.10 IT Equation 2 - IT = $300,000 + 0.40 Admin. Putting Equation 1 in Equation 2, we get IT = $300,000 + 0.40 ($400,000 + 0.10 IT) IT = $300,000 + $160,000 + 0.04 IT IT = 479,167 (Approx.) Putting value of IT in Equation 1, we get Admin. = $400,000 + 0.10 X $479,167 Admin. = $447,917 (Approx.) Now, Allocating Support Department Cost to Operating Departments using Reciprocal Method: Support Operating Administration Information Technology Domestic Tours World Tours Overhead Costs                400,000               300,000           1,350,000            1,860,000 Allocation of Admin. - 40:25:35              (447,917)               179,167               111,979                156,771 Allocation of IT - 10:70:20                   47,917             (479,167)               335,417                  95,833 Total Allocated Costs                           (0)                          (0)           1,797,396            2,112,604 Answer d-2. Reciprocal method - Rrepeated Iterations Support Operating Administration Information Technology Domestic Tours World Tours Overhead Costs                400,000               300,000           1,350,000            1,860,000 First Allocation of Admin. - 40:25:35              (400,000)               160,000               100,000                140,000               460,000 First Allocation of IT - 10:70:20                   46,000             (460,000)               322,000                  92,000 Second Allocation of Admin. - 40:25:35                (46,000)                 18,400                 11,500                  16,100 Second Allocation of IT - 10:70:20                     1,840               (18,400)                 12,880                     3,680 Third Allocation of Admin. - 40:25:35                   (1,840)                       736                       460                        644 Third Allocation of IT - 10:70:20                           74                     (736)                       515                        147 Fourth Allocation of Admin. - 40:25:35                         (74)                          29                          18                           27 Fourth Allocation of IT - 10:70:20                             3                       (29)                          20                             6 Fifth Allocation of Admin. - 40:25:35                           (3)                            1                            1                             1 Fifth Allocation of IT - 10:70:20                            -                            (1)                            1                            -   Sixth Allocation of Admin.                            -                             -                             -                              -   Total Allocated Costs                            -                             -             1,797,395            2,112,605

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