Cost Management: A Strategic Emphasis 7th Edition by Edward Blocher,David Stout ,Paul Juras,Gary Cokins

Exercise 29

Departmental Cost Allocation Data Performance, a computer software consulting company, has three major functional areas: computer programming, information systems consulting, and software training. Carol Bingham, a pricing analyst in the accounting department, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Carol is considering three different methods of the departmental allocation approach to allocate overhead costs: the direct method, the step method, and the reciprocal method. She assembled the following data from the two service departments, information systems and facilities:

Required Use 4 or more decimal places (e.g., 33.3333%) in your calculations.
1. Using computer usage time as the application base for the information systems department and square feet of floor space as the application base for the facilities department, apply overhead from these service departments to the production departments, using these three methods.
a. Direct method.
b. Step method (both for the information systems department going first and for the facilities department going first).
c. Reciprocal method.
2. Rather than allocate costs, how might Data Performance better assign the information systems department's costs
(CMA Adapted)