Required information Problem 7-39 Departmental Cost Allocation [LO 7-3,7-4, 7-5]

Question

Required information Problem 7-39 Departmental Cost Allocation [LO 7-3,7-4, 7-5] [The following information applies to the questions displayed below. Data Performance, a computer software consulting company, has three major functional areas: computer programming information systems consulting, and software training. Carol Bingham, a pricing analyst, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Carol is considering three different methods of the departmental allocation approach to allocate overhead costs: the direct method, the step method, and the reciprocal method. She assembled the following data from the two service departments, information systems and facilities: Service Departments Production Departments Information Information stering$12100 Computer Systems Facilities Programming Consulting Training Software Total $73,000 Budgeted overhead (base) Information Systems (computer hours) Facilities (square feet) $37,000 400 $165,000 200 480 $185,000 $121,000 $581,000 2,000 2,400 400 720 1,000 960 240 Part 1 Required 1. Using computer usage time as the allocation base for the information systems department and square feet of floor space as the application base for the facilities department, apply overhead from these service departments to the production departments, using these three methods a. Direct method b. Step method (both for the information systems department going first and for the facilities department going first) c. Reciprocal method (Round percentage calculations to 4 decimal places (eg, 33.3333%). For all requirements. Do not round your intermediate calculations. Round your final answers to nearest whole dollar amount.)

Explanation / Answer

Solution 1a:

Solution 1b:

Solution c:

Service department cost = Direct Cost + Allocated Cost

Information system Cost = $73,000 + [240/2400]* Facilities cost

= $73,000 + 0.10*Facilities cost

Facilities Cost = $37,000 + [400 / 2000]* information system Cost

= $37,000 + 0.20 * information system Cost

Facilities Cost = $37,000 + 0.20 ($73,000 + 0.10*Facilities Cost)

Facilities Cost = $37,000 + $14,600 + 0.02*Facilities Cost

Facilities Cost = $51,600 / 0.98 = $52,653

Information system Cost = $73,000 + 0.10*$52,653 = $78,265

From Service Department Cost Allocation - Direct Method Service Department Production Departments Info System Facilities Computer programming Info System Consulting Software training Direct charges of department $73,000 $37,000 $165,000 $185,000 $121,000 Info System (200:400:1000) -$73,000 $9,125 $18,250 $45,625 Facilities (480:720:960) -$37,000 $8,222 $12,333 $16,444 Total $0 $0 $182,347 $215,583 $183,069

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