Question:
Reciprocal Cost Allocation-Outsourcing a Service Department
Refer to the facts in Exercise. University Printers estimates that the variable costs in the Personnel Department total $20,000 and in the Maintenance Department variable costs total $8,750. Avoidable fixed costs in the Personnel Department are $6,000. If Warren outsources the Personnel Department functions, what is the maximum they can pay an outside vendor without increasing total costs?
Cost Allocation: Direct Method
University Printers has two service departments (Maintenance and Personnel) and two operating departments (Printing and Developing). Management has decided to allocate maintenance costs on the basis of machine-hours in each department and personnel costs on the basis of labor-hours worked by the employees in each.
The following data appear in the company records for the current period:
|
|
Maintenance
|
Personnel
|
Printing
|
Developing
|
|
Machine-hours
|
-
|
1,000
|
1,000
|
3,000
|
|
Labor-hours
|
500
|
-
|
500
|
2,000
|
|
Department direct costs
|
$15,000
|
$36,000
|
$45,000
|
$30,000
|
Required
Use the direct method to allocate these service department costs to the operating departments