Question

Finch Information Services, Inc., has two service departments: human resources and billing. Finch's operating departments, organized according to the special industry each department serves, are health care, retail, and legal services. The billing department supports only the three operating departments, but the human resources department supports all operating departments and the billing department. Other relevant information follows. Human Resources $900,000 Number of employees Annual cost* Annual revenue 20 Billing 50 $2,710,000 Health Care 195 $6,050,000 $9,500,000 Retail 145 $4,850,000 $5,950,000 Legal Services 110 $2,850,000 $4,550,000 *This is the operating cost before allocating service department costs. Required a. Allocate service department costs to operating departments, assuming that Finch adopts the step method. The company uses the number of employees as the base for allocating human resources department costs and department annual revenue as the base for allocating the billing department costs. b. Allocate service department costs to operating departments, assuming that Finch adopts the direct method. The company uses the number of employees as the base for allocating the human resources department costs and department annual revenue as the base for allocating the billing department costs. C. Compute the total allocated cost of service centers for each operating department using each allocation method.

Answer 1

Answer with working notes is given below

a) Allocation as per Step method Ratio Allocation of Human Resource Department cost Number of Employees Billing Healthcare Retail 145 Legal services 110 500 195 0.1000 0.3900 0.2900 0.2200 1.0000 Overhead allocated $90,000 $351,000 $261,000 $198,000 $900,000 Billing department cost Direct cost Allocated cost of HR Dept Total Overheads $2,710,000 $90,000 $2,800,000 Allocation of Billing Department cost Billing Allocation Ratio Healthcare Retail Legal services Revenue $9,500,000 $5,950,000 $4,550,000 $20,000,000 0.4750 0.2975 0.2275 1.0000 Overhead allocated $1,330,000 $833,000 $637,000 $2,800,000 b) Allocation as per Direct method Ratio Allocation of Human Resource Department cost Number of Employees Healthcare 195 Retail Legal services 110 450 Overhead allocated $390,000 $290,000 $220,000 $900,000 0.4333 0.3222 0.2444 1.0000 145 Allocation of Billing Department cost Billing Allocation Ratio Healthcare Retail Legal services Revenue $9,500,000 $5,950,000 $4,550,000 $20,000,000 0.4750 0.2975 0.2275 1.0000 Overhead allocated $1,287,250 $806,225 $616,525 $2,710,000 Total Allocated cost of Service centres to each Operating department c) Step method Service Departments Operating Departments Human Legal Billing Health Care Retail Total Resources Services $900,000 $2,710,000 $6,050,000 $4,850,000 $2,850,000 $13,750,000 Annual cost Allocation Human Resources -$900,000 $90,000 $351,000 $261,000 $810,000 Billing -$2,800,000 $1,330,000 $833,000 $637,000 $2,800,000 Total Overheads allocated $0 $7,731,000 $5,944,000 $3,685,000 $17,360,000 Direct method Service Departments Operating Departments Human Legal Billing Health Care Retail Total Resources Services $900,000 $2,710,000 $6,050,000 $4,850,000 $2,850,000 $13,750,000 Annual cost Allocation Human Resources -$900,000 $390,000 $290,000 $900,000 Billing -$2,710,000 $1,287,250 $806,225 $616,525 $2,710,000 Total Overheads allocated $0 $7,727,250 $5,946,225 $3,686,525 $17,360,000