Reciprocal Cost Allocation—Outsourcing a Service Department
Refer to the facts in Problem 11 46. The cost accountant at Manzano Bank estimates that the cost structures in their departments are as follows:
|
|
Processing |
Administration |
Maintenance |
Branches |
Electronic |
|
Variable costs |
$ 80,000 |
$240,000 |
$180,000 |
$2,500,000 |
$1,200,000 |
|
Fixed costs |
40,000 |
510,000 |
150,000 |
3,500,000 |
1,050,000 |
|
Total costs |
$120,000 |
$750,000 |
$330,000 |
$6,000,000 |
$2,250,000 |
|
Avoidable fixed costs |
$ 10,000 |
$403,000 |
$120,000 |
$2,112,500 |
$ 910,000 |
Required
a. If Manzano outsources the Processing Department, what is the maximum they can pay an outside vendor without increasing total costs?
b. If Manzano outsources the Administration Department, what is the maximum they can pay an outside vendor without increasing total costs?
c. If Manzano outsources the Maintenance Department, what is the maximum they can pay an outside vendor without increasing total costs?
Problem 11 46: 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?