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

Exercise 43

Departmental Cost Allocation

Computer Intelligence, a computer software consulting company, has three major functional areas: computer programming, information systems consulting, and software training. Carol Bingham, a pricing analyst in the accounting department, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Carol is considering three different methods of the departmental allocation approach to allocate overhead costs: the direct method, the step method, and the reciprocal method. She assembled the following data from the two service departments, information systems and facilities:

	Service Departments		Production Departments
	Information Systems	Facilities	Computer Programming	Information Systems consulting	software Training	Total
Budgeted overhead	$80,000	$45,000	$150,000	$190,000	$135,000	$600,000
Information systems*
(hours)		200	1,200	600	1,000	3,000
Facilities†
(square feet)	200		400	600	800	2,000

* Allocated on the basis of hours of computer usage.

†Allocated on the basis of floor space.

Required

1. Using as the application base computer usage time for the information systems department and square feet of floor space for the facilities department, apply overhead from these service departments to the production departments, using these three methods. Use Excel and Solver to determine the allocations.

?a. Direct method.

?b. Step method.

?c. Reciprocal method.

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2. Rather than allocate costs, how might Computer Intelligence better assign the information systems department's costs?

Step 1 of 5

1.?a. The Direct Method