Question: Support-department cost allocation, reciprocal method. Refer to the data given in Exercise.
1. Allocate the two support departments' costs to the two operating departments using the reciprocal method. Use
(a) linear equations and
(b) repeated iterations.
2. Compare and explain differences in requirement 1 with those in requirement 1 of Exercise. Which method do you prefer? Why?
Exercise: Support-department cost allocation; direct and step-down methods. Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support departments-administrative services (AS) and information systems (IS)-and two operating departments- government consulting (GOVT) and corporate consulting (CORP). For the first quarter of 2017, Phoenix's cost records indicate the following:
1. Allocate the two support departments' costs to the two operating departments using the following methods:
a. Direct method
b. Step-down method (allocate AS first)
c. Step-down method (allocate IS first)
2. Compare and explain differences in the support-department costs allocated to each operating department.
3. What approaches might be used to decide the sequence in which to allocate support departments when using the step-down method?