Answer/Explanation:
a. Allocation of Cost of the service departments to the operating departments using the direct method:
Administration cost:
Total employees = Domestic + International = 45 + 27 = 72
Domestic = 45/72 × 360,000 = $225,000
International = 27/72 × 360,000 = $135,000
Accounting Cost:
Total transaction = Domestic + International = 240,000 + 96,000 = 120,000
Domestic = 24,000/120,000 × 148,000 = $29,600
International = 96,000/120,000 × 148,000 = $118,400
b. Allocation of cost of the service departments to the operating departments using the step method:
Administration cost:
Let’s calculate the ratio
Ratio =28/(28+45+27) = 28/100 ; 45/100; 27/100
Therefore,
Accounting = 28/100 × 360,000 = $100,800
Domestic = 45/100 × 360,000 = $162,000
International = 27/100 × 360,000 = $97,200
Accounting Cost:
Ratio: 24,000/(24,000 + 96,000) = 24,000/120,00 ; 96,000/120,000
Domestic = 24,000/120,000 × 148,000 = $29,600
International = 96,000/120,000 × 148,000 = $118,400
Total Cost after allocation:
Domestic = 955,000 + 162,000 + 29,600 = $1,146,600
International = 3,640,000 + 97,200 + 118,400 = $3,855,600
c. Allocation of the cost of the service departments to the operating departments using the reciprocal method:
From our calculation in b), Administration cost ratio for domestic = 45/100
Therefore, reciprocal = 100/45 × 360,000 = $800,000
Also, Administration cost ratio for International = 27/100
Therefore, reciprocal = 100/27 ×360,000 = $1,333,333
From our calculation in b), Accounting cost ratio for domestic = 24,000/120,000
Therefore, reciprocal = 120,000/24,000 × 148,000 = $740,000
Also, Accounting cost ratio for International = 96,000/120,000
Therefore, reciprocal = 120,000/96,000 × 148,000 = 185,000
Total cost after allocation:
Domestic = 955,000 + 800,000 + 740,000 = $2,495,000
International = 3,640,000 + 1,333,333 + 185,000 = 5,158,333
