that is the nature of a step function cost by

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Unformatted text preview: ent or administering the administration department. To perform the reciprocal allocation, we must set up two equations with two unknowns; the unknowns are the amount of administration to be allocated (which is designated as A) and the amount of maintenance to be allocated (designated as M). Then, since maintenance costs are allocated on the basis of square footage, and administration occupies 1/5 (1,000/5,000) of the square footage, A = $1,200 + 1/5(M) In effect, the amount of administration to be allocated is the sum of its direct costs plus its share of the maintenance costs. Since administration costs are allocated on the basis of hours worked, and maintenance uses 1/6 (100/600) of the hours, M = $2,400 + 1/6(A) That is, the amount of maintenance to be allocated is the sum of its direct costs plus its share of the administration costs. We now can substitute terms, as follows: A = $1,200 + 1/5[{$2,400 + 1/6(A)}], or A = $1,200 + $480 + 1/30(A). Therefore, A = $1,738 And, since M = $2,400 + 1/6(A), M = $2,690 _____________________________________________...
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This document was uploaded on 03/30/2014.

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