Reference no: EM131512787

Sportz, Inc., manufactures athletic shoes and athletic clothing for both amateur and professional athletes. The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows total costs for each manufacturing facility and for each support department.

	Variable Costs	Fixed Costs	Total Costs by Department lin thousands)
Information technology IIT)	S 600	$2.000	$2,600
Human resources IHR)	S 400	$1,000	$1,400
Clothing	S2,500	$8,000	$10,500
Shoes	$3,000	$4,500	$7.500
Total costs	S6.500	$15.500	$22,000

The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) using a single rate based on the following:

Information technology: Number of IT labor-hours worked by department
Human resources: Number of employees supported by department

Data on the bases, by department, are given as follows:

Department		IT Hours Used		Number of Employees
Clothing		5,040		220
Shoes		3,960		88
Information technology		-		92
Human resources		3,000		-

1. What are the total costs of the production departments (clothing and shoes) after the support department costs of information technology and human resources have been allocated using (a) the direct method, (b) the step-down method (allocate information technology first), (c) the step-down method (allocate human resources first), and (d) the reciprocal method?

2. Assume that all of the work of the IT department could be outsourced to an independent company for $97.50 per hour. If Sportz no longer operated its own IT department, 30% of the fixed costs of the IT department could be eliminated. Should Sportz outsource its IT services?

3. Save your work as Microsoft excel spreadsheet

Support-department cost allocations: single-department cost pools; direct, step-down, and reciprocal methods.

1 a. Allocate the total Support Department costs to the production departments under the Direct Allocation Method:

Clothing Shoes
Departmental Costs

From:
Information Technology

Human Resources

Total Departmental Costs

Total Costs to account for:

b. Allocate the Support Department Costs to the Production Department under the Step-down (Sequential) Allocation Method IT first sequentially:

To:

IT HR Clothing Shoes
Departmental Costs

From:
Information Technology

Human Resources

Total Departmental Costs

Total Costs to account for:

c. Allocate the Support Department Costs to the Production Department under the Step-down (Sequential) Allocation Method HR first sequentially:

To:

HR IT Clothing Shoes
Departmental Costs

From:
Human Resources
(92/400) _ $1,400
(220/400) _ $1,400
(88/400) _ $1,400

Information Technology
(5,040/9,000) _ $2,922
(3,960/9,000) _ $2,922
Total Departmental Costs

Total Costs to account for:

d. Allocate the Support Department Costs to the Production Department under the Reciprocal Allocation Method:

i. Assign reciprocal equations to the support departments

IT =
HR =

ii. Solve the equation to complete the reciprocal costs of the support departments

IT =

HR =

iii. Allocate Reciprocal costs to departments (all numbers rounded to nearest dollar)

IT HR Clothing Shoes
Departmental Costs
Information Technology

Human Resources

Total Departmental Costs

Reciprocal Method of Allocating Support Department Costs for Sportz, Inc. Using Repeated Iterations.

Support Departments Operating Departments
IT HR Clothing Shoes
Budgeted manufacturing overhead costs before any interdepartmental cost allocations
1st Allocation of IT Dept.
(0.25, 0.42, 0.33)b

1st Allocation of HR Dept.

2nd Allocation of IT Dept.

2nd Allocation of HR Dept.

3rd Allocation of IT Dept.

3rd Allocation of HR Dept.

4th Allocation of IT Dept.

Total budgeted manufacturing
overhead of operating departments