KMPG is an accounting firm which provide assurance and consulting services to its clients.

KMPG has two supporting departments human resources (HR) and information technologies
(IT). KMPG uses number of employees to allocate HR costs and processing hours to allocate IT
costs. For the first semester 0f 2020, KMPG records the following costs:

Supporting Departments Operating Departments

Human Information Assurance Consulting
Resources Technology Services Services
Budgeted cost before $ 800,000 $ 1,600,000 $ 15,625,000 $ 8,576,000
any interdepartmental
cost allocations
Number of employees - 22 96 49
Processing hours 690 - 2,540 1,750
Auditor hours - - 69,120 -
Consultant hours - - - 35,280

Required:
1. KMPG partners agree to allocate support departments based on a ranking of the percentage
of their total services provided to other support department. The cost of the higher-ranking
department would be allocated first. Allocate the supporting departments’ costs to the
operating departments using the step-down method. (11 points)
2. Client A hires KMPG to audit its financial report. In addition, the corporate secretary
department of Client A hires consultants from KMPG to produce a sustainability report.
KMPG spent 2,400 auditor hours and 1,008 consultant hours for Client A. Calculate the
total cost for Client A. (5 points)
3. One of the KMPG partners argues that the supporting departments have reciprocal
relationship. If the supporting departments costs are to be allocated using reciprocal
method, what is the linear equation applicable for each department? (4 points)