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

Exercise 42

Comparison of Allocation Methods

GB Service Corporation has two service departments, Administration and Accounting, and two operating departments, East and West. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of GB operations follows:

	Administration	Accounting	East	West
Employees	—	25	15	60
Transactions	50,000	—	10,000	40,000
Department direct costs	$60,000	$24,000	$156,000	$600,000

Required

a. Allocate the cost of the service departments to the operating departments using the direct method.

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b.Allocate the cost of the service departments to the operating departments using the step method. Start with Administration.

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c.Allocate the cost of the service departments to the operating departments using the reciprocal method.

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d.Comment on the results.

Step 1 of 5

G Company is a service corporation which has two service departments Administration and Accounting. The two operating departments of the company are E and W.

The total cost to be allocated by the service departments are $60,000 and $24,000.

a.

Under the direct method of allocation of service department costs, administration department cost will be allocated on basis of number of employees and accounting department cost will be allocated on the basis of number of transactions.

	E	W	Total
No. Of employees	15	60	75
Percentage of number of employees on total			100%
No. Of Transactions	10,000	40,000	50,000
Percentage of number of transactions on total			100%