How do you do direct method of cost allocation? How do you find the percentages

ID: 2574935 • Letter: H

Question

How do you do direct method of cost allocation? How do you find the percentages and then what do you multiply those by? The following information is provided:

Also what are the calculations to find the stepdown method with Accounting for and then IM first? Clinic costs are reimbursed and Hopsital costs arent so we want to choose the option with the highest clinic costs.

Administrative Departments Accounting IM Total cost $3,800,000 $4,800,000 Allocation baseNumber of transactions Disk space (gigabytes) Service Levels Transactions Gigabytes Accounting 8 IM 40,000 Hospital 1,100,000 7 Clinic 600,000 Total 1,740,000 24

Explanation / Answer

Cost per transaction = 3800000/1740000 = 2.1839

Cost per gigabyte = 4800000/24 = 200000

Department

Transactions (A)

Gigabytes (B)

Total costs (A+B)

Accounting

8*200000 = 1600000

1600000

40000*2.1839 = 87356

87356

Hospital

1100000*2.1839 = 2402290

7*200000 = 1400000

3802290

Clinic

600000*2.1839 = 1310340

9*200000 = 1800000

3110340