Cost Management
8th Edition
ISBN: 9781259917028
Author: BLOCHER, Edward
Publisher: Mcgraw-hill Education,
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Question
Chapter 7, Problem 41P
To determine
Ascertain the cost allocated using each method of allocation.
Expert Solution & Answer
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)
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Chapter 7 Solutions
Cost Management
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