Cost allocation sample question-direct method


Problem:

Computer Information Services is a computer software consulting company. Its three major functional areas are computer programming, information systems consulting, and software training. Carol Birch, a pricing analyst in the Accounting Department, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Birch is considering three different methods of allocating overhead costs-the direct method, the step method, and the reciprocal method. Birch assembled the following data on overhead from its two service departments, the Information Systems Department and the Facilities Department.

Service Departments    User Departments
Info    Computer
Systems    Facilities    Program    Consult    Training    Total
Budgeted Overhead    $50,000    $25,000    $75,000    $110,000    $85,000    $345,000
Info Systems (hrs)        400          1,100        600           900          3,000
Facilities (Sq ft)          200,000    400,000    600,000    800,000    2,000,000

Information systems is allocated on the basis of hours of computer usage; facilities are allocated on the basis of floor space.

Required:

Allocate the service department costs to the user departments using the direct method. (Round to the nearest dollar and provide total user department costs).

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Accounting Basics: Cost allocation sample question-direct method
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