2 Fahd Compagny is allocating support department costs to operating departments.
ID: 2519931 • Letter: 2
Question
2 Fahd Compagny is allocating support department costs to operating departments.
Actual support costs and allocation base information for the two support departments is shown below.
The costs of support department S1 are allocated based on the number of service calls made, and the costs of support department S2 are allocated based on square feet.
Support Departments Operating Departments
S1 S2 O1 O2
Support costs $80,000 $28,000 ---- ----
Allocation bases:
Service calls 2 4 10 5
Square feet 6,000 3,000 23,000 18,000
Using the reciprocal method:
a. Determine the equations related to the reciprocal exchange of service between S1 and S2 costs
b. Determine the amount of cost allocated from S2 to S1
c. Determine the amount of cost allocated from S1 to O2
Explanation / Answer
Solution a.:
Equation Related to Reciprocal Exchange of Services between S1 and S2:
S1 cost = Direct cost + Allocated cost from S2
S1 cost = $80000 + [6000/(6000+23000+18000)] * S2 Cost
S1 Cost = $80000 + (6000/47000) *S2 Cost
S1 Cost = $80000 + 0.1276595 * S2 Cost
S2 Cost = Direct Cost + allocated cost from S1
S2 Cost = $28000 + [4/(4+10+5)] * S1 Cost
S2 Cost =$28000 + (4/19)* S1 Cost
Solution b:
As determined above, S1 Cost = $80000 + 0.1276595 * S2 Cost
S1 Cost = $80000 + 0.1276595 * [$28000 + (4/19)* S1 Cost]
S1 cost = $80000 + 3574.47 + 0.0268756 * S1 Cost
S1 Cost = $83574.47 / 0.9731244
S1 Cost = $85882.62
Therefore Allocated Cost From S2 to S1 = $85882.62 - $80000 = $5882.62
Solution c:
S1 Cost = $85882.62
Cost allocation from S1 to O2 = S1 cost * 5 / (4+10+5)
= $85882.62 *5/19 = $22600.68
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