ASSIGNMENT MATE Total Costs by Department ia thousands) Information technology I
ID: 2585006 • Letter: A
Question
ASSIGNMENT MATE Total Costs by Department ia thousands) Information technology IT) Human resources (HR) Clothing Shoes Total costs Variable Costs s 500 s 100 $3,000 Fixed Costs 1,500 $ 900 7,000 5,500 $ 2.000 S 1,000 $10,000 $ 8.000 The total costs of the support departments (IT and HRI) are allocated to the production departments (cloth ing and shoes) using a single rate based on the following Information technology: Human resources: Number of IT labor hours worked by department Number of employees supportad by departmant Data on the bases, by department, are given as follows Department Clothing Shoes Information technology Human resources IT Hours Used 5,000 3,000 Number of Employees 120 40 40 2,000 1. What are the total costs of the production departments (clothing and shoes) after the support depart Re ment costs of information technology and human resources have been aljocated using (a) the direct method, fb the step-down method (allocate information technology first), (c) the step-down method (allocate human resources first), and (d) the reciprocal method? 2. Assume that all of the work of the IT department could be outsourced to an independent company for $97.50 per hour. If Spirit Training no longer operated its own IT department, 30% of the fixed costs of the IT department could be eliminated. Should Spirit outsource its IT services? Collaborative Learning Problem 15-35 Revenue allocation, bundled products. Exclusive Resorts (ER) operates a five-star hotel withExplanation / Answer
Production Department Clothing Shoes Support Department Information Tecnology Human Resources Direct Allocation Method 1(a) Clothing Shoes Department Cost $ 10,000.00 $ 8,000.00 From Information Tecnology ($5000/$8000)*$2000 $ 1,250.00 ($3000/$8000)*$2000 $ 750.00 Human Resources (120/160)*$1000 $ 750.00 (40/160)*$1000 $ 250.00 Total Departmental Cost $ 12,000.00 $ 9,000.00 1(b) Allocate support department cost using Step down method(allocate IT department first) IT HR Clothing Shoes Departmental cost $ 2,000.00 $ 1,000.00 $ 10,000.00 $ 8,000.00 From IT department $ (2,000.00) (IT Hours used by Human resource dep/IT Hours used)*IT Deptt cost=(2000/10000)*$2000 $ 400.00 (IT Hours used by clothing dept/IT Hours used)*IT Deptt cost=(5000/10000)*$2000 $ 1,000.00 (IT Hours used by shoes dept/IT Hours used)*IT Deptt cost=(3000/10000)*$2000 $ 600.00 From HR department $ (1,400.00) (No. of employees of HR Dept used by clothing Dept/Number of employees)*HR Deptt cost=(120/160)*$1400 $ 1,050.00 (No. of employees of HR Dept used by IT Dept/Number of employees)*HR Deptt cost=(40/160)*$1400 $ 350.00 Total cost $ - $ - $ 12,050.00 $ 8,950.00 Note: HR Deptt Cost=(Hr Cost+IT Hours used cost)=($1000+$400)=$1400 1(c) Allocate support department cost using Step down method(allocate HR department first) HR IT Clothing Shoes Departmental cost $ 1,000.00 $ 2,000.00 $ 10,000.00 $ 8,000.00 From HR department $ (1,000.00) (HR employees used by IT dept/Total No of employees )*HR Deptt cost=(40/200)*$1000 $ 200.00 (HR employees used by clothing dept/Total No of employees )*HR Deptt cost=(120/200)*$1000 $ 600.00 (HR employees used by shoes/Total No of employees )*HR Deptt cost=(40/200)*$1000 $ 200.00 From IT department $ (2,200.00) (IT Hours used by clothing dept/IT Hours used)*IT Deptt cost=(5000/8000)*$2200 $ 1,375.00 (IT Hours used by shoes dept/IT Hours used)*IT Deptt cost=(3000/8000)*$2200 $ 825.00 Total cost $ - $ - $ 11,975.00 $ 9,025.00 Note: IT Deptt Cost=(IT Cost+HR employees use by IT)=($2000+$200)=$2200 d) 40 Employees of HR Department support IT Department,ratio=(40/200)=.20 2000 IT Hours used by HR Department,ratio=(2000/10000)=.20 Equation IT=2000+.20 HR HR=1000+.20 IT It=2000+.20(1000+.20 IT) 0.96 IT=2000+200+.04IT 0.04 IT-.04IT=2200 .96IT=2200 IT=($2200/.96) IT=$2291.67 HR=1000+.20IT HR=1000+.20*2291.67 HR=1000+458.33 HR=1458.33 2) Outlay due to outsource of work of IT department (97.50 Per Hours)*10000 Hours $ 975,000.00 Saving of fixed cost=($1500000*30%) $ 450,000.00 Variable cost of IT Dept $ 500,000.00 Variable cost of HR Dept $ 100,000.00 Saving of Variable Cost= IT=$500000+.20HR IT=$500000+.20($100000+.20IT) IT=$500000+$20000+.04IT IT-.04IT=$520000 .96IT=$520000 IT= $ 541,666.67 Total Saving of IT Cost=$541667+$450000 $ 991,666.67 Saving is more than outsourcing cost so Spirit should outsource its IT services.