# Department Cost Allocation Using the Direct, Step-Down, and Reciprocal Methods

Department Cost Allocation Using the Direct, Step-Down, and Reciprocal Methods

Project description
Department Cost Allocation Using the Direct, Step-Down, and Reciprocal Methods
The details of this exercise are present in the attached worksheet. The way a company allocates costs to the various departments impacts each department’s budgets. Cost allocations allow projects to be properly accounted for because the expenses fall in line with the services being provided to a specific unit or department. Use the information provided to allocate costs to the various departments, compare costs and explain the differences, and determine the correct approach for proper sequence of cost allocations.

Submission Requirements:

Evaluation Criteria:
You will be graded based upon how well you:
Allocated costs to support departments based on the direct method, step-down method, and reciprocal method.
Compared the support-department costs and elaborated on the differences.
Determined which approach can be used during the step-down method of cost allocation to determine the proper sequence of cost allocations.
Used the formulas to complete your Microsoft Excel workbook using the provided worksheet template.
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Textbook: Horngren, Datar, & Foster,

BU316 Exercise 2.2

Exercise 15-19 (pp.568)
1. Complete the exercise below using the formula(s) as appropriate.

Phoenix Partners provides management consulting service to government and corporate clients.
Phoenix has two support departments-administrative services (AS) and information systems (IS)-
and two operating departments- government consulting (GOVT) and corporate consulting (CORP).
For the first quarter of 2012, Phoenix’s cost records indicate the following.

SUPPORT        OPERATING
AS    IS    GOVT    CORP    Total
interdepartment cost allocations            \$600,000     \$2,400,000     \$8,756,000     \$12,452,000     \$24,208,000
Support work supplied by AS
(budgeted head count)                25%    40%    35%    100%
Support work supplied by IS
(budgeted computer time)            10%        30%    60%    100%

1.    Allocate the two support departments’ costs to the two operating departments using the following  methods:

a.    Direct method costs:

AS    IS    GOVT    CORP
Direct method costs
Allocation of AS costs
Allocation of IS costs

b.    Step-down (AS first) cost

AS    IS    GOVT    CORP
Step-down (AS first) cost
Allocation of AS costs
Allocation of IS costs

c.    Step-down (AS first) cost

AS    IS    GOVT    CORP
Step-down (IS first) cost
Allocation of IS costs
Allocation of AS costs

2.    Compare and explain differences in the support-department costs allocated to each operating department:

GOVT    CORP
Direct Method                        \$0     \$0
Step-down (AS first)                        \$0     \$0
Step-down (IS first)                        \$0     \$0

3.    What approaches might be used to decide the sequence in which to allocate support departments when using the step down method?

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Alternative Joint-Cost Allocation Methods

Project description
Alternative Joint-Cost Allocation Methods
The details of this exercise are present in the attached worksheet. In this assignment, you will be given information on a specific company. Use this information to determine how much of the joint costs per batch would be allocated to each of the products. In addition, you will prepare product line income statements per batch requirements so that you can decide if the company should produce the products or not.

BU316 Exercise 3.1

Exercise 16-19 (p. 597)
1. Complete the exercise below using the formula(s) as appropriate.

The Woods Spirits Company produces two products, turpentine and methanol (wood alcohol), by a joint process.
Joint costs amount to \$120,000 per batch of output.
Each batch totals 10,000 gallons: 25% methanol and 75% turpentine.
Both products are processed further without gain or loss in volume.
Separable processing costs are methanol, \$3 per gallon, and turpentine, \$2 per gallon.
Methanol sells for \$21 per gallon and turpentine sells for \$14 per gallon.

1.    How much of the joint cost per batch will be allocated to turpentine and to methanol, assuming joint costs are allocated based on the number of gallons
at splitoff point?

Methanol    Turpentine    Total
Physical measure of total production
Weighting
Joint costs allocated

2.    If joint costs are allocated on an NRV basis, how much of the joint costs will be allocated to turpentine and to methanol?

Methanol    Turpentine    Total
Final sales value of total production
Less separable costs
NRV at splitoff point:

Weighting
(Hint: percent of total NRV at splitoff point)
Joint costs allocated
(Hint: weighting times total  joint cost allocated)

3.1.    Prepare a product line income statement per batch for requirement 1.

Methanol    Turpentine        Total
Revenue
COGS:
Joint Costs                        0
Separable Costs                        0
Gross margin            \$0     \$0         \$0

3.2.    Prepare a product line income statement per batch for requirement 2.

Methanol    Turpentine        Total
Revenue
COGS:
Joint Costs                        0
Separable Costs                        0
Gross margin            \$0     \$0         \$0

4.    The company has discovered an additional process by which the methanol can be made into a pleasant-tasting alcoholic beverage.  The selling price
of is \$60 per gallon.  Additional processing would increase separable costs \$9 per gallon ( in addition to the 3 per gallon separable cost required to
yield methanol).  The company would have to pay excise tax of 20% on the selling price of the beverage.
Assuming no other changes in cost, what is the joint cost applicable to the wood alcohol (using the NRV method)?  Should the company produce
alcoholic beverages?  Show computations.

Methanol    Turpentine    Total
Final sales value of total production
Less separable costs
NRV at splitoff point:

Weighting
(Hint: percent of total NRV at splitoff point)
Joint costs allocated
(Hint: weighting times total  joint cost allocated)

Should the company produce alcoholic beverage? Show computations.

Incremental revenue
Less Incremental cost: