Question

BluStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations follows. Administration Accounting Domestic International Employees – 28 45 27 Transactions 38,000 – 24,000 96,000 Department direct costs $ 360,000 $ 148,000 $ 955,000 $ 3,640,000 Required: a. Allocate the cost of the service departments to the operating departments using the direct method. b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration. c. Allocate the cost of the service departments to the operating departments using the reciprocal method.

Answer 1

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