Question

Acc203: Managerial Accounting

Gerry & Co (“GC”) is a small bakery chain with four outlets in Singapore. Its first retail outlet also serves as its corporate office, and is located in an old shop house along Sims Road. The corporate office consists of two departments: Admin and Innovation. Currently, the admin department provides its services to other departments and retail outlets, and allocates its costs to these departments and retail outlets based on headcount. On the other hand, the innovation department which supports only the retail outlets, allocates its costs to retail outlets based on the annual sales dollars of each outlet. The following table shows the annual budgets of each support department, the headcount for each department and the annual sales for each retail outlet.

	Headcount	Annual budget	Annual sales
Admin	10	$350,000	-
Innovation	10	$500,000	-
Retail outlet 1	10	-	$325,000
Retail outlet 2	10	-	$275,000
Retail outlet 3	10	-	$175,000
Retail outlet 4	10	-	$225,000
Total	60		$1,000,000

Required:

Required:

1. Compute the allocated support department costs for each retail outlet (1 to 4) using the direct method. (8 marks)

1. Without performing any calculation, explain which support department should be allocated first in a step down approach. (4 marks)
2. Ignoring your answer in part (i), calculate the support departments costs to each retail outlet using the step down approach beginning with the admin department (provide your final answer to the nearest dollar). (8 marks)

3. Discuss if you would recommend that GC use the reciprocal method to allocate support departments’ costs (5 marks)

Answer 1

$ 350.000 Innovation Retail Outlet 1 Retail Outlet 2 Retail Outlet 3 Retail Outlet 4 Total Answer a Admin Department Cost to be allocated SI NO Particulars 1 Head Count 2 Admin Cost Allocation Based on Head Count) 10 101 502 70,000 $ 70,000 $ 70,000 $ 70,000 70,000 $ 350,000 Innovation Department Cost to be allocated $ 570,000 Si No Particulars Retail Outlet 1 Retail Outlet 2 Retail Outlet 3 Retail Outlet 4 1 Annual Sales 325,000$ 275,000 $ 175,000 $ 225,000 $ 2 Admin Cost Allocation 185,250 $ 156,750 $ 99,750 $ 128,250 $ Based on Annual Sales) Total 1,000,000 570,000

In a Step down Approach, the admin department costs should be allocated first to the innvoative department and retail outlets. Subseuqently, the budgeted cost plus the allocated cost of innvoation department should be apportioned aming the retail outlets as shown above in the second table. The Reason for such an allocation is because admin department serves the innovation department and the retail outlets whereas the innovation department serves only the retail outlets.

The Total Allocated cost of Retail Outlets is as follows SI NO Particulars Retail Outlet 1 Retail Outlet 2 Retail Outlet 3 Retail Outlet 4 1 Admin Cost Allocation $ 70,000 $ 70,000$ 70,000 $ 70,000 $ 2 Innovation Cost Allocation $ 185,250 $ 156,750$ 99,750 $ 128,250 $ 3 Total $ 255,250 $ 226,750 $ 169,750 $ 198,250 $ Total 280,000 570,000 850,000
Answer C

Reciprocal method of allocation is used when both service department provide services to each other and their respective costs are to be allocated. In the given case, only admin department serves the innovation department. The innovation department, in turn serves the retail outlets, Therefore, using reciprocal method will not be proper.