Variable Costs Total Costs by Department $ 5,200 Fixed Costs $ 1,200 $ 4,000 Information technology (IT) Human resources (HR) 800 2,000 2,800 Clothing 5,000 16,000 21,000 Shoes 6,000 9,000 15,000 Total costs $13,000 $31,000 $44,000 The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) using a single rate based on the following: Information technology: Number of IT labor-hours worked by department Number of employees supported by department Human resources: Data on the bases, by department, are given as follows: Department IT Hours Used Number of Employees Clothing 10,080 440 Shoes 7,920 176 Information technology 184 Human resources 6,000 1. What are the total costs of the production departments (clothing and shoes) after the support-department costs of information technology and human resources have been allocated using (a) the direct method, (b) the step-down method (allocate information technology first), (c) the step-down method (allocate human resources first), and (d) the reciprocal method? 2. Assume that all of the work of the IT department could be outsourced to an independent company for $97.50 per hour. If Sportz no longer operated its own IT department, 30% of the fixed costs of the IT department could be eliminated. Should Sportz outsource its IT services? Required

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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Support-department cost allocations; single-department cost pools; direct, step-down, and reciprocal methods. Sportz, Inc., manufactures athletic shoes and athletic clothing for both amateur and professional athletes. The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows costs (in thousands) for each manufacturing facility and for each support department.

Variable Costs
Total Costs by Department
$ 5,200
Fixed Costs
$ 1,200
$ 4,000
Information technology (IT)
Human resources (HR)
800
2,000
2,800
Clothing
5,000
16,000
21,000
Shoes
6,000
9,000
15,000
Total costs
$13,000
$31,000
$44,000
The total costs of the support departments (IT and HR) are allocated to the production departments (clothing
and shoes) using a single rate based on the following:
Information technology:
Number of IT labor-hours worked by department
Number of employees supported by department
Human resources:
Data on the bases, by department, are given as follows:
Department
IT Hours Used
Number of Employees
Clothing
10,080
440
Shoes
7,920
176
Information technology
184
Human resources
6,000
1. What are the total costs of the production departments (clothing and shoes) after the support-department
costs of information technology and human resources have been allocated using (a) the direct method,
(b) the step-down method (allocate information technology first), (c) the step-down method (allocate
human resources first), and (d) the reciprocal method?
2. Assume that all of the work of the IT department could be outsourced to an independent company
for $97.50 per hour. If Sportz no longer operated its own IT department, 30% of the fixed costs of the
IT department could be eliminated. Should Sportz outsource its IT services?
Required

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