Required: a. Allocate the cost of the service departments to the operating departments using the direct method. b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration. c. Allocate the cost of the service departments to the operating departments using the reciprocal method.

Required: a. Allocate the cost of the service departments to the operating departments using the direct method. b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration. c. Allocate the cost of the service departments to the operating departments using the reciprocal method.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Overheads

In cost accounting, overhead refers to those expenses which occur during the operating of a business. Overhead includes the fixed, variable, or semi-variable which is not directly involved with a company product or service. It is very important to analyze overhead expense as it helps the company in determining how much a company must charge for its products and services so that they can generate profit. Overhead expenses depend upon the nature of the business operations.

Question

BluStar Company has two service departments, Administration and Accounting, and two operating
departments, Domestic and International. Administration costs are allocated on the basis of employees, and
Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations
follows.
Employees
Transactions
Department direct costs
Required A
Administration
37,000
$363,000
Required:
a. Allocate the cost of the service departments to the operating departments using the direct method.
b. Allocate the cost of the service departments to the operating departments using the step method. Start with
Administration.
c. Allocate the cost of the service departments to the operating departments using the reciprocal method.
Complete this question by entering your answers in the tabs below.
Required B Required C
From
Accounting Domestic International
26
47
22,000
$141,000 $955,000
Department costs
Administration allocation
Accounting allocation
Total cost
Allocate the cost of the service departments to the operating departments using the direct method. (Do not round
intermediate calculations. Negative amounts should be indicated by a minus sign.)
Administration Accounting
< Required A
To
27
88,000
$3,690,000
Domestic
Required B
>
International

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