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 maintenance 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?
By computing the cost per design hour and cost per programming hours (see Excel, attached), you can see that $25 per hour would create savings for programming but not design. Also, there are qualitative reasons to be cautious about outsourcing. ...
The 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. By computing the cost per design hour and cost per programming hours (see Excel, attached), you can see that $25 per hour would create savings for programming but not design.