The XYZ Manufacturing Company has two support activity pools, Accounting (A) and Human Resources (H). Costs for each totaled $420,000 and $270,000 respectively. 20% of the Human Resource costs are consumed by the Accounting department and 10% of the Accounting department costs are consumed by the human resource department. If the company is using the reciprocal method of allocating support costs, the total costs for the Accounting department can be stated as:
A)$420,000 + .10 x ($270,000 + .20 x H)
B) $420,000 + .20 x ($270,000 +.10 x A)
C) $420,000 + .10 x ($420,000 + .10 x A)
D) $420,000 x .20 x ($270,000 + .10 x A)

Question

The XYZ Manufacturing Company has two support activity pools, Accounting (A) and Human Resources (H). Costs for each totaled $420,000 and $270,000 respectively. 20% of the Human Resource costs are consumed by the Accounting department and 10% of the Accounting department costs are consumed by the human resource department. If the company is using the reciprocal method of allocating support costs, the total costs for the Accounting department can be stated as: 
A)$420,000 + .10 x ($270,000 + .20 x H)
B) $420,000 + .20 x ($270,000 +.10 x A)
C) $420,000 + .10 x ($420,000 + .10 x A)
D) $420,000 x .20 x ($270,000 + .10 x A)

Quizplus · Accepted Answer

According to the reciprocal method, we allocate costs in a way that each support department's usage is split between itself and the other departments based on reciprocal percentages. The reciprocal percentage for each department is calculated by dividing the total cost of the other department by its own cost.

In this case, the reciprocal percentage for Accounting is 0.20 (computed by dividing $270,000 by $420,000) and for Human Resources is 0.10 (computed by dividing $420,000 by $270,000).

To allocate Accounting costs, we need to know how much Human Resources consumes. This is 20% of $270,000, or $54,000. Since the reciprocal percentage for Accounting is 0.20, we allocate 0.20 x $54,000 = $10,800 back to Human Resources.

To allocate Human Resources costs, we need to know how much Accounting consumes. This is 10% of $420,000, or $42,000. Since the reciprocal percentage for Human Resources is 0.10, we allocate 0.10 x $42,000 = $4,200 back to Accounting.

Therefore, the total costs for the Accounting department can be stated as: $420,000 + 0.20 x ($270,000 + 0.10 x $420,000) = $420,000 + 0.20 x $66,000 = $420,000 + $13,200 = $433,200.

Option B is the correct choice.

The XYZ Manufacturing Company Has Two Support Activity Pools, Accounting