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

Exercise 30

Departmental Cost Allocation; Outsourcing

Tanner Company produces two software products (NetA and NetB) in two separate departments (A and B). These products are highly regarded network main­tenance programs. NetA is used for small networks and NetB is used for large networks. Williams is known for the quality of its products and its ability to meet dates promised for software upgrades.

?Department A produces NetA, and department B produces NetB. The production departments are supported by two support departments, systems design and programming services. The source and use of the support department time are summarized as follows:

	To
From	Design	Programming	Department A	Department B	Total Labor-Hours
Design	—	4,000	2,000	10,000	16,000
Programming	400	—	400	800	1,600

The costs in the two service departments are as follows:

	Design	Programming
Labor and materials (all variable)	$30,000	$25,000
Depreciation and other fixed costs	38,000	29,000
Total	$68,000	$54,000

Required

1. What are the costs allocated to the two production departments using (a) the direct method, (b) the step method with the sourcing department going first, and (c) the reciprocal method?

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2. What are the total costs in the production departments after allocation?

Step 1 of 5

Cost Allocation

Cost allocation begins with identification of costs incurred by the company, aggregating it and then assigning them to respective activities of the concern. These activities can be separate departments, products or cost centres of the company.