BluStar Company has two service departments, Administration and Accounting, and
ID: 2574669 • Letter: B
Question
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 – 27 49 24 Transactions 33,000 – 23,000 92,000 Department direct costs $ 361,000 $ 143,000 $ 930,000 $ 3,540,000 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
Explanation / Answer
a.) Statement showing allocation of Overheads by Direct Method (Amount in $)
Administration allocation
(on the basis of employees) (49:24)
242,315
(361,000*49/73)
118,685
(361,000*24/73)
Accounting Allocation
(on the basis of no. of transactions) 23000:92000
28,600
(143,000*23,000/115,000)
114,400
(143,000*92,000/115,000)
b.) Statement showing allocation of Overheads by Step Method (Amount in $)
Administration allocation
(on the basis of employees) (27:49:24)
97,470
(361,000*27/100)
176,890
(361,000*49/100)
86,640
(361,000*24/100)
Accounting Allocation
(on the basis of no. of transactions) 23000:92000
48,094
(240,470*23,000/115,000)
192,376
(240,470*92,000/115,000)
c.) Allocation of cost of the service department to the operating department by Reciprocal Method
Administration Cost = 361,000+(33,000/148,000) of Accounting Cost equation 1
Accounting Cost = 143,000+(27/100) of Administration cost equation 2
By putting the value of Accounting cost in equation 1
Admn. Cost = 361,000+[(33/148)(143,000+27% of Admn. Cost)]
Admn. Cost = 361,000+31,885+(33/148)0.27*Admn. Cost
Admn. Cost - 0.060203 Admn. Cost = 392,885
0.939797 Admn. Cost = 392,885
Admn. Cost = 392,885/0.939797 = $418,053
Accounting Cost = 143,000+(27%*418,053) = $255,874
Statement showing allocation of Overheads by Step Method (Amount in $)
Administration allocation
(on the basis of employees) (27:49:24)
204,846
(418,053*49/100)
100,333
(418,053*24/100)
Accounting Allocation
(on the basis of no. of transactions) 23000:92000
39,764
(255,874*23,000/148,000)
159,057
(255,874*92,000/148,000)
Departments Administration Accounting Domestic International Allocated Overheads 361,000 143,000 930,000 3,540,000Administration allocation
(on the basis of employees) (49:24)
(361,000)242,315
(361,000*49/73)
118,685
(361,000*24/73)
Accounting Allocation
(on the basis of no. of transactions) 23000:92000
(143,000)28,600
(143,000*23,000/115,000)
114,400
(143,000*92,000/115,000)
Total - - 1,200,915 3,773,085