Question:
Reciprocal Cost Allocation-Outsourcing a Service Department
GB estimates that the cost structure in the their operations is as follows:
|
|
Administration
|
Accounting
|
East
|
West
|
|
Variable costs
|
$25,000
|
$6,000
|
$113,000
|
$427,000
|
|
Fixed costs
|
35,000
|
18,000
|
43,000
|
173,000
|
|
Total costs
|
$60,000
|
$24,000
|
$156,000
|
$600,000
|
|
Avoidable fixed costs
|
$10,000
|
$3,000
|
$20,000
|
$112,500
|
Required
a. If GB outsources the Administration Department, what is the maximum they can pay an outside vendor without increasing total costs?
b. If GB outsources the Accounting Department, what is the maximum they can pay an outside vendor without increasing total costs?
c. If GB outsources both the Administration and the Accounting Departments, what is the maximum they can pay an outside vendor without increasing total costs?
Comparison of Allocation Methods
GB Service Corporation has two service departments, Administration and Accounting, and two operating departments, East and West. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of GB operations follows:
|
|
Administration
|
Accounting
|
East
|
West
|
|
Employees
|
-
|
25
|
15
|
60
|
|
Transactions
|
50,000
|
-
|
10,000
|
40,000
|
|
Department direct costs
|
$60,000
|
$24,000
|
$156,000
|
$600,000
|
Required
a. Allocate the cost of the service departments to the operating departments using the direct method.
b. Allocate the cost of the service departments to the operating departments using the step method. Start with Administration.
c. Allocate the cost of the service departments to the operating departments using the reciprocal method.
d. Comment on the results.