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    Cost allocation sample question: Direct method

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    2. Computer Information Services is a computer software consulting company. Its three major functional areas are computer programming, information systems consulting, and software training. Carol Birch, 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, Birch is considering three different methods of allocating overhead costs-the direct method, the step method, and the reciprocal method. Birch assembled the following data on overhead from its two service departments, the Information Systems Department and the Facilities Department.

    Service Departments User Departments
    Info Computer
    Systems Facilities Program Consult Training Total
    Budgeted Overhead $50,000 $25,000 $75,000 $110,000 $85,000 $345,000
    Info Systems (hrs) 400 1,100 600 900 3,000
    Facilities (Sq ft) 200,000 400,000 600,000 800,000 2,000,000

    Information systems is allocated on the basis of hours of computer usage; facilities are allocated on the basis of floor space.


    Allocate the service department costs to the user departments using the direct method. (Round to the nearest dollar and provide total user department costs).

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    Solution Summary

    The solution calculates the cost allocation using direct method in the sample question.