Chapter 15, Problem 15.22E

Reciprocal cost allocation (continuation of 15-21). Consider E-books again. The controller of E-books reads a widely used textbook that states that “the reciprocal method is conceptually the most defensible” He seeks your assistance.

1. 1. Describe the key features of the reciprocal method.
2. 2. Allocate the support departments’ costs (human resources and information systems) to the two operating departments using the reciprocal method. Use (a) linear equations and (b) repeated iterations.
3. 3. In the case presented in this exercise, which method (direct, step-down, or reciprocal) would you recommend? Why?

15-21 Direct and step-down allocation. E-books, an online book retailer, has two operating departments—corporate sales and consumer sales—and two support departments—human resources and information systems. Each sales department conducts merchandising and marketing operations independently. E-books uses number of employees to allocate human resources costs and processing time to allocate information systems costs. The following data are available for September 2017:

1. 1. Allocate the support departments’ costs to the operating departments using the direct method.

Required

1. 2. Rank the support departments based on the percentage of their services provided to other support departments. Use this ranking to allocate the support departments’ costs to the operating departments based on the step-down method.
2. 3. How could you have ranked the support departments differently?