Chapter 7, Problem 41P

To determine

Ascertain the cost allocated using each method of allocation.

Explanation of Solution

a) Direct method:

Compute the base for allocation:

Departmental Cost Allocation Bases
Particulars	Information Technology	Operations	Claims Process	Administration	Sales
Information Technology		20%	20%	40%	20%
Operations	10%		10%	50%	30%
Total Amount	$600,000	$1,800,000	$450,000	$850,000	$650,000

Table (1)

Compute the total costs allocated:

Information Technology
Particulars	Claims Process	Administration	Sales
Service percentage	20%	40%	20%
Allocation percentage	25%	50.00%	25.00%
Allocation amount ($600,000)	$150,000	$300,000	$150,000
Operations
Particulars	Claims Process	Administration	Sales
Service percentage	10%	50%	30%
Allocation percentage	11.1111%	55.5556%	33.3333%
Allocation amount ($1,800,000)	$200,000	$1,000,001	$599,999
Particulars	Claims Process	Administration	Sales
Information Technology	$150,000	$300,000	$150,000
Operations	$200,000	$1,000,001	$599,999
Total Amount Allocated	$350,000	$1,300,001	$749,999
Particulars	Claims Process	Administration	Sales
First phase allocation	$450,000	$850,000	$650,000
Information Technology	$150,000	$300,000	$150,000
Operations	$200,000	$1,000,001	$599,999
Total Amount Allocated	$800,000	$2,150,001	$1,399,999

Table (2)

b.1) Split-off method if info systems are split first:

Compute the base for allocation:

Departmental Cost Allocation Bases
Particulars	Information Technology	Operations	Claims Process	Administration	Sales
Information Technology		20%	20%	40%	20%
Operations	10%		10%	50%	30%
Total Amount	$600,000	$1,800,000	$450,000	$850,000	$650,000

Table (3)

Compute the total costs allocated:

Particulars	Operations	Claims Process	Administ-ration	Sales
Service percentage	20%	20%	40%	20%
Allocation amount ($600,000)	$120,000	$120,000	$240,000	$120,000
Operations
Particulars	Claims Process	Administ-ration	Sales
Service percentage	10%	50%	30%
Allocation percentage	11.1111%	55.5556%	33.3333%
Allocation amount ($1,920,000)	$213,333	$1,066,668	$639,999
Particulars	Claims Process	Administ-ration	Sales
First phase allocation	$450,000	$850,000	$650,000
Information Technology	$120,000	$240,000	$120,000
Operations	$213,333	$1,066,668	$639,999
Total Amount Allocated	$783,333	$2,156,668	$1,409,999

Table (4)

b.2) Split-off method if info systems are split first:

Compute the base for allocation:

Departmental Cost Allocation Bases
Particulars	Information Technology	Operations	Claims Process	Administration	Sales
Information Technology		20%	20%	40%	20%
Operations	10%		10%	50%	30%
Total Amount	$600,000	$1,800,000	$450,000	$850,000	$650,000

Table (5)

Compute the total costs allocated:

Particulars	Operations	Claims Process	Administ-ration	Sales
Service percentage	10%	10%	50%	30%
Allocation amount ($1,800,000)	$180,000	$180,000	$900,000	$540,000
Information Technology
Particulars	Claims Process	Administ-ration	Sales
Service percentage	20%	40%	20%
Allocation percentage	25%	50.00%	25.00%
Allocation amount ($780,000)	$195,000	$390,000	$195,000
Particulars	Claims Process	Administ-ration	Sales
First phase allocation	$450,000	$850,000	$650,000
Operations	$180,000	$900,000	$540,000
Information Technology	$195,000	$390,000	$195,000
Total Amount Allocated	$825,000	$2,140,000	$1,385,000

Table (6)

c) Reciprocal method

Compute the base for allocation:

Departmental Cost Allocation Bases
Particulars	Information Technology	Operations	Claims Process	Administration	Sales
Information Technology		20%	20%	40%	20%
Operations	10%		10%	50%	30%
Total Amount	$600,000	$1,800,000	$450,000	$850,000	$650,000

Table (7)

Compute the total costs allocated:

Information Technology
Particulars	Claims Process	Administration	Sales
Allocation percentage	20%	40%	20%
Allocation amount ($795,918.37)	$159,184	$318,367	$159,184
Operations
Particulars	Claims Process	Administration	Sales
Allocation percentage	10%	50%	30%
Allocation amount ($1,959,183.67)	$195,918	$979,592	$587,755
Particulars	Claims Process	Administration	Sales
First phase allocation	$450,000	$850,000	$650,000
Information Technology	$159,184	$318,367	$159,184
Operations	$195,918	$979,592	$587,755
Total Amount Allocated	$805,102	$2,147,959	$1,396,939

Table (8)

Compute the base for allocation:

Reciprocal Cost allocation Using Solver
Particulars	Allocated costs	Service rates to		Allocation to
		Information Technology	Operations	Information Technology	Operations
Information Technology	$795,918.37	1.00	(0.20)	$795,918	($159,184)
Operations	$1,959,183.67	(0.10)	1.00	($195,918)	$1,959,184
Total				$600,000	$1,800,000

Table (9)