The City of Harris has two departments—Parks and Recreation (P&R) and Facility M
ID: 2595706 • Letter: T
Question
The City of Harris has two departments—Parks and Recreation (P&R) and Facility Maintenance (FM)—
that provide services to its citizens. P&R offers many programs in art, culture and athlectics, while the FM department maintains all the streets, buildings, and other public facilities. Behind the scenes, Harris has two departments that support the activities of the P&R and FM departments. The Human Resources department processes payroll and oversees all hiring, development, and training. The General Administration department provides IT support, overall coordination, and managerial support.
The table below provides data regarding the costs traced to and consumption of services by various activity pools/departments.
HR
GA
P&R
FM
Traced costs
$100,000
$60,000
$360,000
$450,000
Service consumption pattern
HR
GA
P&R
FM
Services
provided by
HR
40%
30%
30%
GA
20%
60%
20%
7-6. Use the reciprocal method to allocate the two support departments to the line departments.
7-7. Which method of the three (direct method / step-down method / reciprocal method) gives the most accurate estimate of the cost of the support services consumed by P&R and FM departments?
HR
GA
P&R
FM
Traced costs
$100,000
$60,000
$360,000
$450,000
Explanation / Answer
Answer 7-6. Reciprocal method - Linear Equations Express Support department budgeted costs and reciprocal relationships in the form of linear equations: Equation 1 - HR = $100,000 + 0.20 GA Equation 2 - GA = $60,000 + 0.40 HR Putting Equation 1 in Equation 2, we get GA = $60,000 + 0.40 ($100,000 + 0.20 GA) GA = $60,000 + $40,000 + 0.08 GA GA = 108,695.70 or say $108,696 (Approx.) Putting value of GA in Equation 1, we get HR = $100,000 + 0.20 X $108,696 HR = $121,739 (approx.) Now, Allocating Support Department Cost to Operating Departments using Reciprocal Method: Support Operating HR GA P&R FM Overhead Costs 100,000 60,000 360,000 450,000 Allocation of HR - 40:30:30 (121,739) 48,696 36,522 36,521 Allocation of GA - 20:60:20 21,739 (108,696) 65,218 21,739 Total Allocated Costs - - 461,740 508,260 Answer 7-7. The reciprocal method recognizes all the relations between support departments and operating departments. So, reciprocal method is the best method.