Problem 1 Nokia Inc. has two user departments, Wireless Communications & Digital

Question

Problem 1

Nokia Inc. has two user departments, Wireless Communications & Digital Communications. The two support departments are Technical Support (TS) & Research & Development (R&D). The costs incurred in each of these departments are as follows:

Wireless Communications

$110,000

Digital Communications

$60,000

TS

$80,000

R&D

$90,000

The actual level of support is as follows:

Supplied by

Used by

TS

R&D

Wireless

Digital

TS

20%

50%

30%

R&D

30%

25%

45%

Determine the cost allocated to:

Wireless Communications using the reciprocal method

Digital Communications using the reciprocal method

Wireless Communications

$110,000

Digital Communications

$60,000

TS

$80,000

R&D

$90,000

Explanation / Answer

Total Cost of Service Department are as under

TS(Say X)= $80000+30% of R&D(Y)

R&D(Say Y)= $90,000+20% of TS(X)

Allocation will be as under

If we Replace the Y with teh Value in First Equation

X= $80000+30%(90000+0.20X)

X= 80000+27000+0.06X

0.94X=113830

X=113830

By Putting the value of X in Equation 2

Y= 90000+0.2*113830

Y= 90000+22766

Y= 112766

User Department Service Department Wireless Digital TS R&D Original Cost $110,000 $60,000 $80,000 $90,000 Dsitribution of Servic Department TS 56915 34149 -113830 22766 R&D 28191 50745 33830 -112766 Total Departmental Cost $195,106 $144,894 $0 $0

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