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Cost Allocation Using Direct, Step and Reciprocal Methods.

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Departmental Cost Allocation; Outsourcing
Tanner Company produces two products, NetA and NetB) in two separate departments (A and B). These products are highly regarded network
tenance programs. NetA is used for small networks and NetB is used for large networks. Williams known for the quality of its products and its ability to meet dates promised for software upgrades. Department A produces NetA, and department B produces NetB. The production departments are supported by two support departments, systems design and programming services. The source use of the support department time are sununarized as follows:

Data Input Design Program Dept A Dept B
Design hours 4,000 2,000 10,000
Programming hours 400 400 800
Support service cost $68,000 $54,000

1. What are the costs allocated to the two production departments from the two service departments using
(a) the direct method, (b) the step method (design department goes first), and (c) the reciprocal method?
2. The company is considering outsourcing programming services to DDB Services, Inc., for $25 per hour.
Should Tanner do this?

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Solution Summary

The step, direct and reciprocal method is done for you in Excel so that you have a model for future similar problems. Steps for creating the inverse coefficient matrix are included. A discussion about the quantitative and qualitative issues with outsourcing is included (about 100 words).

Solution provided by:
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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