Reference no: EM132753369

Children s Books, Inc. has 2 revenue-producing departments: Board Books and Interactive eBooks. The company has 2 support departments: Administration and Accounting. Administration costs are allocated based on the square footage occupied, while Accounting costs are allocated based on the number of employees.

Costs and allocation bases are presented below:

Department                  Employees              Footage               Direct Cost
Administration               4                         12,500                $1,120,000
Accounting                   10                      15,000                      564,000
Board Books                  80                     65,000                      4,520,000
Interactive Books              30                  80,000                         2,340,000

Problem (a) Using the direct method, allocate the support department costs to the revenue-producing departments. What are the total costs of each revenue-generating department after the allocation?

Problem (b) If the benefits-provided ranking is (1) Administration and (2) Accounting, use the step method to allocate the support department costs to the revenue-generating department What are the total costs of each revenue-generating department after the allocation?

Problem (c) Use the algebraic (or reciprocal) method to allocate the support department costs to the revenue-generating departments. What are the total costs for each revenue-generating department after the allocation?

Problem (d) Discuss the advantages and disadvantages of each method. Be sure to Identify behavioral issues that might arise as a consequence of using the various methods. Which method would you recommend for Children's Books, Inc.? Justify your response