SOLUTION
(20 min.) Support-department cost allocations: direct, step-down, and reciprocal methods.
1 a. Allocate the total Support Department costs to the operating departments under the
Direct Allocation Method:
Eastern
Department
Western
Department
Departmental Overhead Costs $650,000 $ 920,000
From:
Information Technology
b. Allocate the Support Department Costs to the Operating Departments under the
Step-down (Sequential) Allocation Method with Engineering first sequentially:
To:
Engineering IT
Eastern
Department
Western
Department
Departmental Overhead Costs $ 300,000 $250,000 $650,000 $ 920,000
From:
Information Technology (340,000)
c. Allocate the Support Department Costs to the Operating Departments under the
Step-down (Sequential) Allocation Method IT first sequentially:
To:
IT Engineering
Eastern
Department
Western
Department
Departmental Costs $250,000 $300,000 $650,000 $ 920,000
From:
Engineering (337,500)
Total Costs to account for: $2,120,000
d. Allocate the Support Department Costs to the Operating Departments under the
Reciprocal Allocation Method:
Assign reciprocal equations to the support departments: Engineering (E) and
Information Technology (IT)
Solve the equation to complete the reciprocal costs of the support departments
Allocate Reciprocal costs to departments (all numbers rounded to nearest dollar)
Engineering IT
Eastern
Department
Western
Department
Information Technology (356,021)
Solution Exhibit 15-36 shows the allocation of the IT and HR Department costs to the
Eastern Department and to the Western Department using repeated iterations.
2. Summary of cost allocation resulting from the four methods in part 1:
Eastern
Department
Western
Department
Although the reciprocal method produces the most accurate support department cost allocation, it
is also the most complicated. The step-down method with Engineering being the primary
department produces similar results. That is due to the fact that 30% of Engineering services are
provided to the IT department, another support department, while only 15% of IT services are
provided to Engineering. Therefore, the step-down method with Engineering as the primary
department would be an acceptable substitute for the reciprocal method.
SOLUTION EXHIBIT 15-36
Reciprocal Method of Allocating Support Department Costs for Ballantine Tours Using
Repeated Iterations.
Support Departments Operating Departments
Engineeri
ng IT Eastern Western
Budgeted manufacturing overhead
costs before any interdepartmental
cost allocations $300,000 $250,000 $650,000 $ 920,000
Total accounts allocated and reallocated (the numbers in parentheses in first two columns)
Try It 15-1 Solution
1. A combined budgeted rate is used for fixed and variable costs. The rate is calculated as
follows:
The rate of $65 per hour is used to allocate engineering-services department costs to the
machining and assembly departments.
Under the single-rate method, the Machining and Assembly Departments are charged the
budgeted rate for each hour of actual use of engineering services.
The costs allocated to the Assembly Department in 2017 equals:
3. Using the 8,000 hours of practical capacity of the Engineering Services Department, the
budgeted rate is:
Budgeted fixed-cost rate per hour, $280,000 ÷ 8,000 hours
Under the single rate method, the Engineering Services Department costs are allocated to the
Machining and Assembly Departments as follows:
Machining Department: $60 per hour × 2,000 (actual) hours
Fixed costs of unused engineering-services capacity:
$35 per hour × 2,000 hoursa
4. Under the dual rate method, the Engineering Services Department costs are allocated to
the Machining and Assembly Departments as follows:
Machining Department
Fixed costs: $35 per hour × 2,500 (budgeted) hours
Assembly Department
Fixed costs: $35 per hour × 4,500 (budgeted) hours
Fixed costs of unused engineering-services capacity:
b1,000 hours
=
Practical capacity of 8,000 hours − (2,500 hours budgeted to be used by Machining Department
+
4,500 hours budgeted to be used by Assembly Department).
Try It 15-2 Solution
1a. Allocate the total Support Department costs to the operating departments under the Direct
Allocation Method:
Domestic Tours World Tours
Total Costs to account for: $3,790,000
b. Allocate the Support Department Costs to the Operating Departments under the
Step-down (Sequential) Allocation Method with Administration first sequentially:
To:
Administration IT
Domestic
Tours
World
Tours
Total Costs to account for: $3,790,000
c. Allocate the Support Department Costs to the Operating Departments under the
Step-down (Sequential) Allocation Method IT first sequentially:
To:
IT Administration
Domestic
Tours
World
Tours
Total Costs to account for: $3,790,000
d. Allocate the Support Department Costs to the Operating Departments under the
Reciprocal Allocation Method:
Assign reciprocal equations to the support departments
Solve the equation to complete the reciprocal costs of the support departments
Allocate Reciprocal costs to departments (all numbers rounded to nearest dollar)
Administration IT
Domestic
Tours
World
Tours
Costs allocated to the Domestic Tours Department equal $356,250 ($116,357 +
$239,893). Costs allocated to the World Tours Department equal $293,750 ($162,899
+ $130,851). Total Support Department Costs to account for $650,000
(Administration, $400,000 + Information Technology, $250,000).
Try It Exhibit 15-2 shows the allocation of the IT and HR Department costs to the
Domestic Tours Department and to the World Tours Department using repeated
iterations.
TRY IT EXHIBIT 15-2
Reciprocal Method of Allocating Support Department Costs for Montvale Tours Using
Repeated Iterations.
Support Departments Operating Departments
Administratn. IT Domestic World
Budgeted manufacturing overhead
costs before any interdepartmental
Total accounts allocated and reallocated (the numbers in parentheses in first two columns)
Try It 15-3 Solution
1. Stand-alone cost-allocation method.
Taylor Inc. =
Victor Inc. =
$54,000
2. With Taylor Inc. as the primary party:
Party Costs Allocated
Cumulative Costs
Allocated
With Victor Inc. as the primary party:
Party Costs Allocated
Cumulative Costs
Allocated
3. To use the Shapley value method, consider each party as first the primary party and then
the incremental party. Compute the average of the two to determine the allocation.
Taylor Inc.:
Using this approach, Taylor Inc. is allocated $33,000, and Victor, Inc. is allocated $21,000 of the
total costs of $54,000.
4. The results of the four cost-allocation methods are shown below.
Taylor Inc. Victor Inc.
The allocations are very sensitive to the method used. With the incremental cost-allocation
method, Taylor Inc. and Victor Inc. would probably have disputes over who is the primary party
because the primary party gets allocated all of the primary party’s costs. The stand-alone method
is simple and fair because it allocates the common cost of the dyeing machine in proportion to
the individual costs of leasing the machine. The Shapley values are also fair. They result in
allocations that are similar to those of the stand-alone method. Either of the methods can be
chosen. Given its simplicity, the stand-alone method is likely more acceptable.
Try It 15-4 Solution
1a. Under the stand-alone revenue-allocation method based on selling price, Him will be
allocated 33.33% of all revenues, or $20 of the bundled selling price, and Her will be
allocated 66.67% of all revenues, or $40 of the bundled selling price, as shown below.
Stand-alone method, based on
selling prices Him Her Total
1b. Under the incremental revenue-allocation method, with Him ranked as the primary
product, Him will be allocated $25 (its own stand-alone selling price), and Her will be
allocated $35 of the $60 selling price, as shown below.
Incremental Method
(Him rank 1)
Hi
m Her
1c. Under the incremental revenue-allocation method, with Her ranked as the primary product,
Her will be allocated $50 (its own stand-alone selling price) and Him will be allocated $10 of
the $60 selling price, as shown below.
Incremental Method
(Her rank 1) Him Her
1d.Under the Shapley value method, each product will be allocated the average of its
allocations in 1b and 1c, i.e., the average of its allocations when it is the primary product and
when it is the secondary product, as shown below.
Shapley Value Method Him Her
2. A summary of the allocations based on the four methods in requirement 1 is shown below.
Stand-alone
(Selling Prices)
Incrementa
l (Him
first)
Incremental
(Her first)
Shaple
y
If there is no clear indication of which product is the more “important” product, or if it can
be reasonably assumed that the two products are equally important to the company’s strategy,
the Shapley value method is the fairest of all the methods because it averages the effect of