Question:
Cost Allocation: Step and Reciprocal Methods
Manzano Bank has two operating departments (Branches and Electronic) and three service departments (Processing, Administration, and Maintenance). During November, the following costs and service department usage ratios were recorded:
|
Supplying
|
Using Department
|
|
Department
|
Processing
|
Administration
|
Maintenance
|
Branches
|
Electronic
|
|
Processing
|
-0-
|
50%
|
-0-
|
10%
|
40%
|
|
Administration
|
-0-
|
-0-
|
-0-
|
60%
|
40%
|
|
Maintenance
|
10%
|
20%
|
-0-
|
20%
|
50%
|
|
Direct cost
|
$120,000
|
$750,000
|
$330,000
|
$6,000,000
|
$2,250,000
|
Required
a. Allocate the service department costs to the two operating departments using the reciprocal method.
b. Now allocate the service department costs to the two operating departments using the step method, allocating maintenance costs first, followed by processing, and then administration. How does your answer differ from what you obtained in (a)? Why?