The Transport department has budgeted variable costs of $116,000 and budgeted fixed costs of $160,000. Lumber budgets it will use 15,000 miles of transport services, sandstone budgets 8,000 miles. Actual transport usage was 12,500 and 9,000 miles How can we allocate the transport costs to the two divisions?
Problem in allocating support costs Support departments may provide support to each other in addition to operations divisions How to account for the support these departments provide each other?
Allocation Methods 1. Direct 2. Step-Down 3. Reciprocal
Direct Method Allocates support costs only to Operating Departments No Interaction between Support Departments prior to allocation
Step-Down Method Allocates support costs to other support departments and to operating departments that partially recognizes the mutual services provided among all support departments One-Way Interaction between Support Departments prior to allocation
Reciprocal Method Allocates support department costs to operating departments by fully recognizing the mutual services provided among all support departments Full Two-Way Interaction between Support Departments prior to allocation
Choosing Between Methods Reciprocal is the most precise Direct and Step-Down are simple to compute and understand Direct Method is widely used
Support Allocation Example Gopher Inc. has two operations divisions, Commercial and Governmental. It also has two support departments, IT and HR. Total costs for IT are $420,000, and $275,000 for HR. The support departments provide services for other departments according to the following breakdown: What are the allocations using the direct, step-down, and reciprocal methods?
- Fall '11
- support departments