ACG 4361
Handout #2B – Support Cost Allocation
Spring 2016
Problem 1 – Two scenarios appear below. For each, identify if the cost allocation method should be selected
from group A or from group B? Explain.
Group A
Simple allocation
ABC
Group B
Direct method
Step down method
Reciprocal method
Scenario 1
Excellence Pastries produces baked goods. Baking costs are allocated to the products based on the baking
time required for the product. Baking costs of $291,500 are budgeted in a period when 550,000 total minutes of
baking time and 100,000 minutes of cooling time are anticipated. A batch of rolls bakes for 45 minutes and
then cools for 15 minutes. Management wants to know what amount of baking cost will be allocated to each
batch of rolls.
Scenario 2
Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the specifications for the
new computer system were established, the audit division needed 50% of the capacity, the tax division
required 30%, and business consulting required 20%. The fixed computer department costs are allocated
based on computer needs. The variable costs of the computer department are allocated based on the minutes
of computer time that each department uses. The computer division budget for fixed costs is $450,000, and the
budget for variable costs is $145,600. The company anticipates using 520,000 minutes of computer time. The
business consulting division uses 78,000 minutes of computer time. Management wants to know what amount
of computer department costs will be allocated to the business consulting division.
Problem 2 The corporate office for TerraTime provides 2 kinds of services (maintenance and personnel) to
TerraTime’s 3 locations (East, West, South). Maintenance costs are allocated on the basis of square feet, and
personnel costs are allocated based on the basis of number of employees.
Square Feet
Employees Direct Costs
Support Departments:
Maintenance
1,200
8
$32,000
Personnel
1,800
6
$21,000
Operating Departments:
East
3,000
32
$47,000
West
2,000
16
$54,000
South
5,000
40
$97,000
Use the three methods to allocate support department costs to determine:
A. Total support costs allocated to each location
B. Total department costs after allocation for each location
DIRECT
Direct costs
Support Depts.
Maintenance
Personnel
$32,000
$21,000
Allocate maintenance
Allocate personnel
Total costs allocated
Total costs by dept.
STEP DOWN
Operating Departments
East
West
North
$ 47,000
$ 54,000
$
97,000
(32,000)
$
-
(21,000)
-
$
-
Support Depts.
Maintenance Personnel
$
9,600
6,400
16,000
7,636
17,236
64,236
3,818
10,218
64,218
9,545
25,545
122,545
$
$
Operating Departments
East
West
North
Direct costs
$32,000
$21,000
$47,000
$54,000
$97,000
Allocate maintenance
(32,000)
4,881
8,136
5,424
13,559
-
(25,881)
-
$
9,411
17,547
$64,547
4,706
10,129
$64,129
11,764
25,324
$122,324
Allocate personnel
Total costs allocated
Total costs by dept.
RECIPROCAL
Direct costs
Allocate maintenance
Allocate personnel
Total costs allocated
Total costs by dept.
$
-
Support Depts.
Maintenance Personnel
$32,000
$21,000
Operating Departments
East
West
North
$47,000
$54,000
$97,000
(34,185)
5,215
8,691
5,794
14,485
2,185
(26,215)
$
$
8,738
17,429
$64,429
4,369
10,163
$64,163
10,923
25,408
$122,408
0
0
Problem 3 Sanyo Products is a manufacturer of data storage devices. Sanyo operates two support
departments—maintenance and technology, and two production departments—assembly and testing.
Maintenance costs are allocated on the basis of square footage occupied, and technology costs are allocated
on the basis of the number of workstations. The following data relate to allocations of service department
costs:
Maintenance
Technology
Assembly
Testing
Department costs
$43,200
$61,500
$87,000 $15,000
Square footage
5,000
10,000
20,000
15,000
Workstations
4
5
20
16
In good form, prepare a complete analysis of the allocation of support costs using the reciprocal method. Show
all calculations and circle the amount of the total allocated support costs to the technology department. DO
NOT round in the interim.
DIRECT
Direct costs
Support Depts.
Maintenance Technology
$
43,200
$ 61,500
Operating Departments
Assembly
Testing
$
87,000
$15,000
Support Depts.
Maintenance Technology
$
43,200 $ 61,500
Operating Departments
Assembly
Testing
$
87,000
$15,000
Support Depts.
Maintenance Technology
$
43,200 $ 61,500
Operating Departments
Assembly
Testing
$
87,000 $ 15,000
Allocate maintenance
Allocate technology
Total costs allocated
Total costs by dept.
STEP DOWN
Direct costs
Allocate maintenance
Allocate technology
Total costs allocated
Total costs by dept.
RECIPROCAL
Direct costs
Allocate maintenance
Allocate technology
Total costs allocated
Total costs by dept.
Problem 4 iElectric has 2 operating departments—industry and private for which the corporate office provides
2 kinds of services, administrative and housekeeping. Administrative costs are allocated on the basis of
number of employees, and housekeeping costs are allocated based on the basis of number of square feet.
iElectric recognizes the step-down allocation based on the department that renders the largest proportion of its
costs to other support departments.
Administrative
Housekeeping
Industry
Private
Departmental Costs
$43,000
39.000
63,000
41,000
# of Square feet
1,000
5,000
4,000
6,000
# of Employees
10
4
42
24
A. Show calculations to identify which department from which you should begin allocating support
costs, and concisely explain your choice of department.
B. Determine the complete reciprocated cost of each of the two support departments (i.e., set up
the two simultaneous equations and solve for the total cost in each.)