Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 33

Departmental Cost Allocation

Swanick Corporation prepares business plans and marketing analy­ses for start-up companies in the Boston area. Swanick has been very successful in recent years in providing effective service to a growing number of clients. The company provides its service from a single office building in Boston, and is organized into two main client-service groups: one for market research and the other for financial analysis. The two groups are treated as cost centers with budgeted annual costs of $750,000 and $1,000,000, respectively. In addition, Swanick has a support staff that is organized into two main functions; one for clerical, facilities, and logistical support (called the CFL group) and another for computer-related support. The CFL group is also a cost center with budgeted annual costs of $500,000, while the annual cost of the computer group is $600,000.

?Tom Miggs, CFO of Swanick, plans to prepare a departmental cost allocation for his four groups, and he assembles the following information:

?Percentage of estimated dollars of work and time by CFL:

20%—sservice to the computer group

50%—service to market research

30%—service to financial analysis

Percentage of estimated dollars of work and time by the computer group:

12%—service to the CFL group

44%—service to market research

44%—service to financial analysis

Required Using a spreadsheet, determine the total cost in the financial analysis and market research groups, after departmental allocation, using the direct method, the step method, and the reciprocal method.