Ex: 1

X Company has 2 operating departments (A and B) and 3 service

departments (C, D, and E). During May, the following costs and
service department usage ratios were recorded:
Supplying Using departments
departments
C D E A B
C 0 50% 0 10% 40%
D 0 0 0 60% 40%
E 10% 20% 0 20% 50%
Direct cost $120,000 750,000 330,000 6,000,000 2,250,000
Required:
a- Allocate the service departments cost to the operating
departments using the direct method.
b- Allocate the service departments cost to the operating
departments using the step method.
c- Allocate the service departments cost to the operating
departments using the reciprocal method.

Solution
(a) Direct method
TO
From C D E A B
Direct costs 120,000 750,000 330,000 6,000,000 2,250,000
C (120,000) -- -- 24,000 96,000
D -- (750,000) -- 450,000 300,000
E -- -- (330,000) 94285.7 235714.3
0 0 0 6,568,285.7 2,881,714.3
 (b) Step method
C provides services for 3 departments the second
D provides services for 2 departments the third
E provides services for 4 departments the first
TO
From E C D A B
Direct costs 330,000 120,000 750,000 6,000,000 2,250,000
E (330,000) 33,000 66,000 66,000 165,000
C -- (153,000) 76,500 15,300 61,200
D -- -- (892,500) 535,500 357,000
0 0 0 6,616,800 2,833,200

(c) Reciprocal method

C = 120,000 + 10% E
D = 750,000 + 50% C + 20% E
E = 330,000

C = 120,000 + 10% * 330,000 = 153,000

D = 750,000 + 50% * 153,000 + 20% * 330,000 = 892,500
To
From C D E A B
Direct costs 120,000 750,000 330,000 6,000,000 2,250,000
C (153,000) 76,500 0 15,300 61,200
D 0 (892,500) 0 535,500 357,000
E 33,000 66,000 (330,000) 66,000 165,000
0 0 0 6,616,800 2,833,200
 Ex: 2
X Company has 2 operating departments (A and B) and 3 service
departments (Maintenance, HR, and Buildings). The following data
are available:
Operating departments Service departments
A B Maint. HR Build.
Total Costs 18,000 15,000 4,000 3,000 2,000
Area (m2) 60 20 15 5 --
No. of employees 10 7 -- -- --
No. of MHs 250 150 -- 30 --
Required:
a- Allocate the service departments cost to the operating
departments using the step method.
b- Calculate the POHR for each operating department using the
MHs as an allocation base.
c- Assume that, the prime cost for job order no. 666 equal $
10,000, and it needs 20 MHs in department A and 25 MHs in
department B, compute the total cost of the job no. 666.
Solution
(a)
 Buildings dep. provides service for 4 departments 1
 HR dep. provides service for 2 departments 3
 Maint. dep. provides service for 4 departments 2

- Buildings dep. Cost = 2,000 and the allocation base is area

Rate = 2,000 / 100 m2 = 20 / m2
Interest of A = 20 * 60 = 1,200
B = 20 * 20 = 400
Maint. = 20 * 15 = 300
HR = 20 * 5 = 100
 - Maintenance dep. Cost = 4,300 and the allocation base is MHs
Rate = 4,300 / 430 = 10 / MH
Interest of A = 10 * 250 = 2,500
B = 10 * 150 = 1,500
HR = 10 * 30 = 300

- HR dep. Cost = 3,400 and the allocation base is NO. of employees

Rate = 3,400 / 17 = 200 / employee
Interest of A = 10 * 200 = 2,000
B = 7 * 200 = 1,400
Build. Maint. HR A B Base
Total Costs 2,000 4,000 3,000 18,000 15,000 Common cost
Allocate cost of Build. (2,000) 300 100 1,200 400 Area
Allocate cost of Maint. (4,300) 300 2,500 1,500 MHs
Allocate cost of HR. (3,400) 2,000 1,400 # of employees
Total cost 0 0 0 23,700 18,300

(b)
POHR for A = 23,700 / 250 = 94.8 / MH
POHR for B = 18,300 / 150 = 122 / MH

(c)
Prime cost 10,000
+ Cost in A (20 * 94.8) 1,896
+ Cost in B (25 * 122) 3,050
Total cost 14,946