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

Exercise 28

Departmental Cost Allocation HomeLife Life Insurance Company has two service departments (actuarial and premium rating) and two production departments (advertising and sales). The distribu­tion of each service department's efforts (in percentages) to the other departments is

	To
From	Actuarial	Premium Rating	Advertising	Sales
Actuarial	—	80%	10%	10%
Premium	20%	—	20%	60%

The direct operating costs of the departments (including both variable and fixed costs) are

Actuarial	$80,000
Premium rating	15,000
Advertising	60,000
Sales	40,000

Required

1. Determine the total cost allocated to the advertising and sales departments using the direct method.

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2. Determine the total cost allocated to advertising and sales using the step method.

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3. Determine the total cost allocated to advertising and sales using the reciprocal method.

Step 1 of 10