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Problem - Amy's Binders produces and sells both custom and ordinary binders. The company has four departments: Marketing, HR, Custom Binders, and Ordinary Binders.
The Marketing and HR departments provide support services for each other as well as for the operating departments. The two operating departments run completely independently of each other. Amy uses the number of employees to allocate HR costs, and the total dollars spent to allocate Marketing costs. The following data is available for the year just ended:
Support Departments
Operating Departments
Marketing
HR
Custom
Ordinary
Costs incurred before allocations
800,000
500,000
1,400,000
1,600,000
Total dollars spent
-
120,000
650,000
730,000
Number of employees
15
310
675
REQUIRED -
a. Assume that Amy allocates the costs of its support departments to the operating departments using the direct method. Calculate the total cost, including allocations, of each of the two operating departments.
b. Disregard your answers to (a). Assume that Amy allocates the costs of its support departments to the operating departments using the reciprocal method. Calculate the total cost, including allocations, of each of the two operating departments.
c. Compare your answers in a and b. Do you think the difference is significant? Fully explain your answer.
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