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E-Books: Allocate the support department costs to the revenue-producing departments using the direct method

Cost accounting: A managerial emphasis 3rd Canadian edition ISBN: 0130355801
Chapter 14/ question 21
E-BOOKS is an online book retailer. The company has four departments. The two revenue producing departments are corporate sales and consumer sales. The two support departments are administrative (human resources, accounting and so on) and information systems (IS). Each of the sales departments conducts merchandising and marketing operations independently.
The following data for September 2002 will assist you in allocating costs to the different departments.
Revenue #of employees Processing time used
Corporate sales $1,334,200 42 1920
Consumer sales $667,000 28 1600
Administrative - $0 14 320
IS - $0 21 1120
Costs incurred in each of four departments for September 200s are as bellows.
Corporate sales $998,270
Consumer sales 489,860
Administrative 72,700
Information systems 234,400
1) Allocate the support department costs to the revenue-producing departments using the direct method
2) Develop appropriate overhead allocation rates for the four departments. Rank the support departments on the percentage of their services rendered to other support departments (using September departmental costs). Use this ranking and your overhead rates to allocate support costs based on the step-down allocation method;
3) Could you have ranked the support departments differently? If so, how else could you rank the support departments? Had you done so in this problem, would the allocations have changed?

Solution Preview

If we take the direct method and allocate the costs, we can allocate the overhead according to the sales revenue. The sales revenue are distributed as 1,334,200 : 667,000 that is 2:1 . Using this direct proportion we get the administrative cost of 72,700 can be allocated as 48,467 to the Corporate sales and 24,234 to the consumer sales.
Similarly the Information systems cost of 234,400 can be allocated as 156,267 to the corporate sales and 78134 to the consumer sales.

For using the step down method we need two things first the ranking, Second the rates. There are two possible rankings, we can rank ...

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