Problem: Balco Inc. has two production departments, Clear and Cream, and two service departments, Electricity and Water. Electricity renders 10% of its services to Water, 30% to Clear, and 60% to Cream, while Water renders 50% of its services to Electricity, 10% to Clear, and 40% to Cream. Total costs before allocation are $200,000 for Electricity and $300,000 for Water. You are the manager of the Cream department.
1. Upper management has decided to use the step down method (allocating Water first). How much service department cost would be allocated to your department? (SHOW COMPUTATIONS)
2. Provide to upper management the equations you would use (SET UP THE EQUATIONS BUT DO NOT SOLVE THEM) if you were to utilize the reciprocal method.