At the end of a long day of training, Steven and Carol are visiting over one last cup of coffee. The final segment of thetraining session, yet to come, is a refresher on support department cost allocation methods. Steven is thinking ofskipping out early, since his company firmly believes in only one of these methods.Steven: I'm telling you, Carol, the reciprocal method is the only way to go. It's by far the most accurate, and eventhough it takes a little bit of set-up in Excel (or something similar), the additional accuracy is worth it.Carol:Carol knew that this session was on the schedule for today's training, so she brought her own direct method costallocations along. She quickly pulled them out of her bag and showed Steven the following.CostsA's time (in hours) provided toB's time (in hours) provided toCostsReally? At our company we have always used the direct method. We find that it's much easier to explainthis approach to our operating managers, and everyone appreciates the simplicity of it. We use our extratime to perform other worthwhile analyses for our company. Besides, have you ever really compared yourfinal costs under the reciprocal method with what they'd be under the direct method? I bet they're noteven that different.Allocation of AAllocation of BTotals(a)Total costSupportDepartmentsA$55,000(55,000)SupportDepartmentsA$55,000100B$79,000(79,000)B$79,000200OperatingDepartmentsL$334,000OperatingDepartments500300M$638,000LM$334,000 $638,00034,37520,62559,25019,750$427,625 $678,375 $1,106,000Support Department Cost Allocation ComparisonLTo prove Carol's point, allocate the support department costs in her company using the reciprocal method in Excel.M300100Totals$1,106,000Are the final cost allocations similar under the direct and reciprocal methods?

Lets understand the basics.Cost of service department allocated to production department using,(1)…

otals $427,625 $678,375 $1,106,000 To prove Carol's point, allocate the support department costs in her company using the reciprocal method in Exce Total cost Support Department Cost Allocation Comparison L M

otals $427,625 $678,375 $1,106,000 To prove Carol's point, allocate the support department costs in her company using the reciprocal method in Exce Total cost Support Department Cost Allocation Comparison L M

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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