Problem 11-49 Comparison of Allocation Methods (LO 11-2, 3, 4) BluStar Company h
ID: 2553035 • Letter: P
Question
Problem 11-49 Comparison of Allocation Methods (LO 11-2, 3, 4) 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: Administration Accounting Domestic International Employees – 29 48 23 Transactions 35,000 – 22,000 88,000 Department direct costs $ 353,000 $ 148,000 $ 945,000 $ 3,560,000 Required: a. 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.) b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.) c. Allocate the cost of the service departments to the operating departments using the reciprocal method. (Do not round intermediate calculations. Negative amounts should be indicated by a minus sign.)
Explanation / Answer
a) Allocation of cost of service departments using the direct method (Amounts in $)
b) Allocation of cost of service departments using the step method (Amounts in $)
c) Firstly we need to set up equations
Cost of Administration department (S1) = Direct costs+(Cost of Accounting department*35/145)
Cost of Accounting department (S2) = Direct costs+(Cost of Administration department*29/100)
S1 = $353,000+(S2*35/145) Equation A
S2 = $148,000+(S1*29%) Equation B
By substituting equation B into equation A
S1 = $353,000+[($148,000+S1*0.29)*35/145]
S1 = $353,000+($148,000*35/145)+(0.29*35/145*S1)
S1 = $353,000+$35,724.14+0.07S1
S1 - 0.07S1 = $388,724.14
0.93S1 = $388,724.14
S1 = $388,724.14/0.93 = $417,983
S2 = $148,000+($417,983*0.29) = $269,215
Allocation of cost of service departments using the step method (Amounts in $)
Departments Administration Accounting Domestic International Direct Costs 353,000 148,000 945,000 3,560,000 Administration allocation (in the ratio of 48:23 no. of employees) (353,000) - 238,648 114,352 Accounting allocation (in the ratio of 22,000:88,000 no. of transactions) - (148,000) 29,600 118,400 Total cost allocated 0 0 1,213,248 3,792,752