Question 41 on chapter 7. Book Cost Management 7th edition. Required Use 4 or mo

Question

Question 41 on chapter 7. Book Cost Management 7th edition.

Required Use 4 or more decimal places in your calculations. Allocate the $4350,000 total departmental costs to all three operating departments using (a) the direct method, (b) the step method, and 9c) the reciprocal method.

Support Departments Operating Departments Information Technology Operations Claims Processing Admisnistration Sales Information Technology 20 20 40 20 Operations 10 10 50 30 IT 600,000 Operations 1,800,000 Claims Process. 450,000 Administration 850,000 Sales 650,000 Total Cost 4,350,000

Explanation / Answer

Solution a:

Solution b:

Solution c:

Service department cost = Direct Cost + Allocated Cost

IT Department Cost = $600,000 + 0.10 * Operation Cost

                                                   

Operation Department Cost = $1,800,000 + 0.20 * IT Department Cost

                               

Operation department cost = $1,800,000 + 0.20 * ($600,000 + 0.10 * Operation Cost)

Operation department cost = $1,800,000 + $120,000 + 0.02*Operation Cost

Operation department cost = $1,920,000 / 0.98 = $1,959,184

IT Department Cost = $600,000 * $1,959,184 * 10% = $795,918

From Service Department Cost Allocation - Direct Method Service Department Operating Departments IT Operations Claim Processing Administartion Sales Direct charges of department $600,000.00 $1,800,000.00 $450,000.00 $850,000.00 $650,000.00 IT (2:4:2) -$600,000.00 $150,000.00 $300,000.00 $150,000.00 Operations (1:5:3) -$1,800,000.00 $200,000.00 $1,000,000.00 $600,000.00 Total $0.00 $0.00 $800,000.00 $2,150,000.00 $1,400,000.00

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