Support-department cost allocation; direct and step-down methods. Phoenix Partne
ID: 2449936 • Letter: S
Question
Support-department cost allocation; direct and step-down methods. Phoenix Partners pro- vides management consulting services to government and corporate clients. Phoenix has two support departments—administrative services (AS) and information systems (IS)—and two operating departments— government consulting (GOVT) and corporate consulting (CORP). For the first quarter of 2012, Phoenix’s cost records indicate the following:
A
B
C
D
E
F
G
1
SUPPORT
OPERATING
2
AS
IS
GOVT
CORP
Total
3
Budgeted overhead costs before any
4
interdepartment cost allocations
$690,000
$1,800,000
$8,650,000
$12,450,000
$23,590,000
5
Support work supplied by AS (budgeted head count)
—
25%
45%
30%
100%
6
Support work supplied by IS (budgeted computer time)
10%
—
27%
63%
100%
1. Allocate the two support departments’ costs to the two operating departments using the following methods:
a. Direct method
b. Step-down method (allocate AS first)
c. Step-down method (allocate IS first)
2. Compare and explain differences in the support-department costs allocated to each operating department.
3. What approaches might be used to decide the sequence in which to allocate support departments
when using the step-down method?
A
B
C
D
E
F
G
1
SUPPORT
OPERATING
2
AS
IS
GOVT
CORP
Total
3
Budgeted overhead costs before any
4
interdepartment cost allocations
$690,000
$1,800,000
$8,650,000
$12,450,000
$23,590,000
5
Support work supplied by AS (budgeted head count)
—
25%
45%
30%
100%
6
Support work supplied by IS (budgeted computer time)
10%
—
27%
63%
100%
Explanation / Answer
Answer:1
a. Direct Mathod:
a. Direct Method AS IS Govt. Corp.
Costs $690,000 $1800,000
Alloc. of AS costs
(45/75, 30/75) (690,000) $ 414,000 $ 276,000
Alloc. of IS costs
(27/90, 63/90) (1800,000) 540,000 1,260,000
$ 0 $ 0 $954,000 $1536,000
b. Step-down method (allocate AS first):
b. Step-Down (AS first)
Costs $690,000 $1800,000
Alloc. of AS costs
(0.25, 0.45, 0.30) (690,000) 172500 $ 310500 $ 207,000
Alloc. of IS costs
(27/90, 63/90) (1972500) 591750 1,380750
$ 0 $ 0 $902250 $1,587750
c. Step-down method (allocate IS first):
c. Step-Down (IS first)
Costs $690,000 $1800,000
Alloc. of IS costs
(0.10, 0.27, 0.63) 180,000 (1800,000) $ 486,000 $1,134,000
Alloc. of AS costs
(45/75, 30/75) (870,000) 522,000 348,000
$ 0 $ 0 $1,008,000 $1,482,000
Answer:2
2. Govt. Corp.
Direct method $954,000 $1,536,000
Step-Down (AS first) 9022,50 1,587750
Step-Down (IS first) 1,008,000 1,482,000
The direct method ignores any services to other support departments. The step-down method partially recognizes services to other support departments. The information systems support group (with total budget of $1800,000) provides 10% of its services to the AS group. The AS support group (with total budget of $690,000) provides 25% of its services to the information systems support group.
Answer:3
Three criteria that could determine the sequence in the step-down method are:
a. Allocate support departments on a ranking of the percentage of their total services provided to other support departments.
1. Administrative Services 25%
2. Information Systems 10%
b. Allocate support departments on a ranking of the total dollar amount in the support departments.
1. Information Systems $1800,000
2. Administrative Services $ 690,000
c. Allocate support departments on a ranking of the dollar amounts of service provided to other support departments
1. Information Systems
(0.10 ´ $1800,000) = $180,000
2. Administrative Services
(0.25 ´ $690,000) = $172500
The approach in (a) above typically better approximates the theoretically preferred reciprocal method. It results in a higher percentage of support-department costs provided to other support departments being incorporated into the step-down process than does (b) or (c), above.
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