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Show the sum of direct and indeirect cost in each function and department.
Total Overhead Costs $ 416,966.67 $ 569,000.00 $ 152,033.33 $ 173,916.67 $ 225,800.00 $ 30,283.33 $ 1,568,000.00
The proration of indirect cost is necessary because there must be a just and fair charging of all the expenses to the specific department. Without proper
proration, the profitability of products could be distorted after allocation of common cost. Profitable products could be loss-making or vice-versa. It may also affect
the financial success of the product/service that may in turn affect management and workers’ motivation because there are indirect costs that need to be recovered
through product and service pricing.
(3) Using the direct method, allocate the service functions to the operating departments and develop the overhead rates for each of the operating
departments. (Round allocations to the nearest dollar and overhead rates to four decimal places.)
Direct Method
Distribution of Secretarial 57,972 86,958 28,986 - 173,917 -
Distribution of Research 84,675 112,900 28,225 - 225,800 -
Total 559,614 768,858 209,244 - - 1,537,717
Step-down Method
Distribution of Secretarial 43,479 65,219 21,740 - 173,917 43,479 -
Distribution of Research 100,980 134,640 33,660 - - 269,279 -
Total 561,426 768,858 207,433 - - 1,537,717
Reciprocal Method
Distribution of Secretarial 49,748 74,622 24,874 - 198,992 49,748 -
Distribution of Research 93,934 125,237 31,302 25,075 - 275,548 -
Total 560,649 768,858 208,210 - - 1,537,717
Let S = Secretarial
R = Research
S = 173,916.67 + 9.10% R
R = 225,800.00 + 25% S
Insurance
Coverage for equipment, fixtures, and furniture 750.00
Malpractice 10,333.33
Leasing 9,600.00
Utilities 6,000.00
Janitorial 3,600.00
Total Administrative Costs 30,283.33
As stated in most discussion, the direct method is the simplest method since it ignores the services provided by
the service department to the producing departments. On the other hand, step-down method provides for allocation of a
service department’s cost to other departments, as well as to operating departments. But we should always note that the
allocation begins with the greatest amount of service rendered to other departments. Moreover, the most effective
allocation method is noted as the reciprocal method because it provides the full recognition of the indirect costs to all
departments. With the overhead rate data given:
With regards to the criminal department, the step-down method has the highest cost at $1.8714, followed by the
reciprocal method at $1.8688 and lastly the direct method at $1. 8654.
Looking at the Personal & Family department, the lowest overhead is in the step-down method at $41. 4866, followed
by the reciprocal method at $41.6419 and the highest overhead rate is at $41.8489 using direct method.
To conclude, if the company is looking for an accurate charging of indirect costs, it must make use of the reciprocal
method. This is because it allocates indirect expenses to all departments in the company. Moreover, if the company
wants to use a practical method that is easy to use and convenient to management, it must use the direct method for
allocation of indirect expenses. However, it is still the management’s say as to what specific method to use provided
that they will shoulder all the possible losses that they will encounter given the chosen allocation method.