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

Exercise 46

Cost Allocation: Step and Reciprocal Methods

Manzano Bank has two operating departments (Branches and Electronic) and three service departments (Processing, Administration, and Maintenance). During November, the following costs and service department usage ratios were recorded:

Using Department
Supplying Department	Processing	Administration	Maintenance	Branches	Electronic
Processing	-0-	50%	-0-	10%	40%
Administration	-0-	-0-	-0-	60%	40%
Maintenance	10%	20%	-0-	20%	50%
Direct cost	4120,000	$750,000	$330,000	$6,000,000	$2,250,000

Required

a. Allocate the service department costs to the two operating departments using the reciprocal method. (Hint: You do not need to use a computer or study the Appendix in this chapter.)

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b. Now allocate the service department costs to the two operating departments using the step method, allocating maintenance costs first, followed by processing, and then administration. How does your answer differ from what you obtained in (a)? Why?

Step 1 of 3

Cost allocation:

Cost allocation is the assigning of a common cost to numerous cost objects. For instance, an enterprise would possibly allocate or assign the value of a high-priced laptop to the three important regions of the company that use the gadget. A company with most effective one electric meter may allocate the energy invoice to several departments inside the agency.