Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 32

Reciprocal Cost Allocation—Outsourcing a Service Department

Refer to the facts in Exercise 11-24. University Printers estimates that the variable costs in the Personnel Department total $20,000 and in the Maintenance Department variable costs total $8,750. Avoidable fixed costs in the Personnel Department are $6,000.

Required

If Warren outsources the Personnel Department functions, what is the maximum they can pay an outside vendor without increasing total costs?

Step 1 of 5

Cost accounting system

This is a system designed for inhouse or internal managers and their decision making. Cost accounting information is not needed for comparison with other companies. This information is commonly used in financial accounting also, but it is primarily used by company managers for their decision making. It is important that cost accounting information is relevant for the decision making of the manager.

Cost allocation of service departments

Service departments like human resource, administration, accounts, IT etc. render their services to other user departments which may include production or other service departments also. The costs of these service departments also need to be allocated among other user departments for product and departmental costing purposes. There are different methods used for service costs allocation like direct method, step method and reciprocal method.