I- books, an online book retailer, has two operating departments-corporate sales

Question

I- 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.I-books uses number of employees to allocate human resources costs and processing time to allocate information systems costs. The controller of I -books reads a widely used textbook that states that "the reciprocal method is conceptually the most defensible." He seeks your assistance. The following data are available for September 2013 EEB (Click the icon to view the data.) (Click the icon to view the direct allocation data.) (Click the icon to view the step-down allocation data.) Requirements 1. Describe the key features of the reciprocal method 2. Allocate the support departments' costs (human resources and information systems) to the two operating departments using the reciprocal methoo 3. In the case presented in this exercise, which method (direct, step-down, or reciprocal) would you recommend? Why? Requirement 1. Describe the key features of the reciprocal method Interdepartmental relationships are The reciprocal allocation method explicitly includes the mutual services provided among all support departments fully incorporated into the support department cost allocations. Requirement 2. Allocate the support departments'costs (human resources and information systems) to the two operating departments using the reciprocal method Before we can allocate the support departments' costs to the two operating departments using the reciprocal method, let's first determine the linear equations for each support department. Then off-line solve for HR and IS (Information Systems), so that you may complete the allocation of the support departments' costs (Abbreviations used: HR human resources; IS-information system.) HR- $75,000+0.10000 IS IS$230,000 0.20000 HR Now allocate the support departments' costs (human resources and information systems) to the two operating departments using the reciprocal method. (Round proportions to five decimal places, .XxXXX, and your final answers to the nearest whole dollar. Use parentheses or a minus sign when decreasing departments by allocating costs. Enter a "O" for zero balances.) Support Deparments Operating Departments HR Info. Systems Corporate Consumer Total Costs incurred Allocation of HR costs Allocation of Info. Systems costs Total budgeted costs of operating departments

Explanation / Answer

2) Under reciprocal method, two equations are formed and solved for calculating the value of one variable. These calculations are shown as follows:-

HR = $75,000+0.10 IS - Eqn 1

IS = $230,000+0.20 HR - Eqn 2

Now replace the value of HR in Eqn 2 by Eqn 1

IS = $230,000+0.20($75,000+0.10 IS)

IS = $230,000+($75,000*0.20)+(0.10 IS*0.20)

IS = $230,000+$15,000+0.02 IS

IS - 0.02 IS = $245,000

0.98 IS = $245,000

IS = $245,000/0.98 = $250,000

HR = $75,000+($250,000*0.10) = $100,000

  Allocation of cost (Amounts in $)

3) The reciprocal method is more accurate than the direct and step-down methods when there are reciprocal relationships among support departments. Thus reciprocal method should be used.

Support Departments Operating Departments Particulars HR Info. Systems Corporate Consumer Total Costs Incurred 75,000 230,000 975,000 470,000 1,750,000 Allocation of HR costs (allocated in the ratio of 20:50:30) (100,000) 20,000 50,000 30,000 Allocation of Info. systems costs (allocated in the ratio of 375:2,700:675) 25,000 (250,000) 180,000 45,000 Total budgeted costs of operating departments 0 0 1,205,000 545,000 1,750,000

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