Exercise 11-36 Reciprocal Cost Allocation-Outsourcing a Service Department (LO 1

Question

Exercise 11-36 Reciprocal Cost Allocation-Outsourcing a Service Department (LO 11-4, 5)

University Printers has two service departments (Maintenance and Personnel) and two operating departments (Printing and Developing). Management has decided to allocate maintenance costs on the basis of machine-hours in each department and personnel costs on the basis of labor-hours worked by the employees in each.

The following data appear in the company records for the current period:

University Printers estimates that the variable costs in the Personnel Department total $7,000 and in the Maintenance Department variable costs total $3,000. Avoidable fixed costs in the Personnel Department are $4,000.

Required: If University Printers outsources the Personnel Department functions, what is the maximum it can pay an outside vendor without increasing total costs?

Maintenance Personnel Printing Developing Machine-hours ----- 1,000 1,000 3,000 Labour-hours 500 ----- 500 2,000 Department direct costs 5,000 12,000 15,000 10,000

Explanation / Answer

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Maintenance Personal Printing Developing Total MH 1000 1000 3000 5000 LH 500 500 2000 3000 Cost 5000 12000 15000 10000 42000 Variable Cost 3000 7000 Avoidable 4000 Ratio: Machine Hour 1000/5000 1/5 Labor Hour 500/3000 1/6 Total Service Department Cost= Direct Cost+Cost allocated to Service Department Maintenance S1 3000+1/6S2 Personal Deparment Personnal S2 7000+1/5 S1 S2= 7000+1/5(3000+1/6S2) S2= 7000+600+1/30S2 29/30S2= 7600 S2= 7862 Hence, Voidable Variable Cost 7862 Add: Voidable Fixed Cost 4000 Total Maximum Amount 11862

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