ALLOCATING SUPPORT DEPARTMENT COSTS

PART 1

Red Ball Printers has 3 operating departments: Catalogue, Magazine and Book
Departments. The Cleaning Department provides services to these departments. The
allocation base for Cleaning is cleaning hours to represent usage of Cleaning Services.

Budgeted cleaning hours for November is 5,000 based on the following budgeted usage:
Catalogue Department 1,200 hrs

Magazine Department 1,600 hrs

Book Department 2,200 hrs

Total 5,000 hrs

Budgeted costs of Cleaning for November are $200,000. These costs comprise the
following:

• Fixed: $130,000 (fixed within relevant range of 1,000 -10,000 computing hours)
• Variable: $14 per computing hour ($70,000 in total)

Actual usage of Cleaning Department for November is:

Catalogue Department 1,200 hrs

Magazine Department 1,800 hrs (not 1,600)

Book Department 1,900 hrs (not 2,200)

Total 4,900 hrs

Red Ball Printers’ 3 operating departments have the following practical capacity:
Catalogue Department 1,375 hrs

Magazine Department 1,925 hrs

Book Department 2,200 hrs

Total 5,500 hrs

REQUIRED:
a) Determine a single budgeted application rate for November.
b) Allocate Cleaning Department costs to operating departments using the rate from part
a).
c) Allocate Cleaning Department costs to operating departments using dual rates.
PART 2

At the end of November actual Cleaning variable costs amounted to $78,400. The Cleaning
department did not operate as efficiently as expected in November. In particular, three
employees from the Cleaning department have been disciplined for wasting time on jobs
undertaken for the Catalogue and Book Departments. This inefficiency resulted in additional
costs of around $7,000.

REQUIRED:

a) What should variable costs have equaled?

b) Allocate actual variable costs to the three operating departments.
c) Compare the allocation of actual and budgeted costs?

PART 3

Red Ball Printers actually has two Support Departments: Cleaning and Maintenance.
Budgeted Cleaning costs are as above.

Budgeted Maintenance costs are as follows:

Fixed = $100,000

Variable = $80,000

Cleaning Maintenance Catalogue Magazine Book

Cleaning Hours
-- 1250 1200 1600 2200
*

Maintenance
80 -- 150 130 140
Hours #

* Allocation base for Cleaning is Cleaning Hours

# Allocation base for Maintenance is Maintenance Hours

REQUIRED:

Allocate support department costs to operating departments using the following methods:

a) Direct method
b) Sequential (Step-down) method
c) Reciprocal method
LECTURE ILLUSTRATION 2 (Red Ball Printers) WORKSHEET

Part 1

REQUIRED:

a) Determine a single budgeted application rate for November.

November’s single budgeted application rate is _________________.
Equivalent to -
• $14 of variable costs per hour and;
• $26 of fixed costs per hour ($130,000/5,000)

b) Allocate Cleaning Department costs to operating departments using the rate from part
a).
Cost allocation to Departments
Catalogue: $40 x 1,200 hours = $48,000
Magazine:
Book:
Total Allocation:
Is this an appropriate allocation?
c) Allocate Cleaning Department costs to operating departments using dual rates.
• Variable rate = $14 ( given)
• Fixed rate: Need to determine allocation ratios (allocation bases) for each operating
department based on practical capacity proportions
Catalogue Department 1,375/5,500 = 25%
Magazine Department
Book Department

• Budgeted Cleaning Fixed Costs =$130,000

• Cleaning Fixed Cost allocation to operating departments:

Department Ratios Fixed Cost Allocation

Catalogue 25%

Magazine 35%

Book 40%
 • Total of Fixed and Variable Cost allocations

Fixed Cost
Department Variable Cost allocation Total Allocation
Allocation

$32,500 $16,800 $49,300

Catalogue
($14 x 1,200)

Magazine

Book

Total $130,000 $68,600 $198,600

• Comparison of single and dual rates for support department costs

Department Single rate Allocation Dual rate Allocation

Catalogue $48,000 $49,300

Magazine

Book

Total $196,000 $198,600

Part 2

(a) What should actual variable costs have equalled? _____________

• Actual variable cost=Actual cleaning hours used x application rate
• Most of the difference appears to be due to the inefficiencies in the Cleaning
Department
• What happens if actual costs are allocated?
(b) Allocate actual variable costs to the three operating departments.
• Actual Cleaning Department variable costs = $78,400
• Actual Allocation rate = $78,400/4,900 = $16/hour
 Department Actual Usage (hours) Actual Variable Cost
Allocation

Catalogue 1,200

Magazine 1,800

Book 1,900

Total 4,900

(c) Compare the allocation of actual and budgeted costs

Department Actual Variable Budgeted Difference

Cost Allocation Variable Cost
Allocation

Catalogue $19,200 $16,800 $2,400

Magazine

Book

Part 3

• Red Ball Printers actually has two Support Departments

– Cleaning and Maintenance
• Budgeted Cleaning costs (as previously)
– Fixed = $130,000
– Variable = $70,000
• Budgeted Maintenance costs
– Fixed = $100,000
– Variable = $80,000

REQUIRED:

Allocate support department costs to operating departments using the following methods:
a. Direct method
Cleaning Mainten. Catalogue Magazine Book

Initial Costs $70,000 $80,000 $300,000 $350,000 $480,000

Cleaning Ratios

Cleaning Alloc’n

Mainten. Ratios

Mainten. Alloc’n

Totals

b. Sequential (Step-down) method

Allocation Ratios:

Cleaning Mainten. Catalogue Magazine Book

Cleaning Hours - 1250 1200 1600 2200

Ratios

Mainten. Hours - 150 130 140

Ratios
Allocation of Support Department Costs:

Cleaning Mainten. Catalogue Magazine Book

Initial Costs $70,000 $80,000 $300,000 $350,000 $480,000

Cleaning

Ratios

Alloc’n

Mainten. Ratios

Alloc’n

Totals

c. Reciprocal method
Equations:

Maintenance cost (M) = $80,000 + 20% of C

Cleaning cost (C) = $70,000 + 16% of M

Calculate:

Maintenance cost (M) = Cleaning cost (C) =

Cleaning Mainten. Catalogue Magazine Book

Initial Costs $70,000 $80,000 $300,000 $350,000 $480,000

Cleaning

Ratios

Alloc’n

Mainten. Ratios

Alloc’n

Totals
 Direct Method Sequential Method Reciprocal Method

Catalogue

Magazine

Book

Total $1,280,000 $1,280,000 $1,280,000