Homework SourseI understand the first half just not the both half Sportz In
I understand the first half just not the both half.
Sportz, Inc., manufactures athletic shoes and athletic clothing for both amateur and professional athletes. The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows total costs for each manufacturing facility and for each support department.
The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) using a single rate based on the following:
Information technology: Number of IT labor-hours worked by department
Human resources: Number of employees supported by department
Data on the bases, by department, are given as follows:
Department
IT Hours Used
Number of Employees
Clothing
5,040
220
Shoes
3,960
88
Information technology
-
92
Human resources
3,000
-
What are the total costs of the production departments (clothing and shoes) after the support department costs of information technology and human resources have been allocated using (a) the direct method, (b) the step-down method (allocate information technology first), (c) the step-down method (allocate human resources first), and (d) the reciprocal method?
Assume that all of the work of the IT department could be outsourced to an independent company for $97.50 per hour. If Sportz no longer operated its own IT department, 30% of the fixed costs of the IT department could be eliminated. Should Sportz outsource its IT services?
| Support-department cost allocations: single-department cost pools; direct, step-down, and reciprocal methods. | |||||
| 1 | a. | Allocate the total Support Department costs to the production departments under the Direct Allocation Method: | |||
| Clothing | Shoes | ||||
| Departmental Costs | $10,500 | $7,500 | |||
| From: | |||||
| Information Technology | |||||
| (5040/9000)*2600 | $1,456 | ||||
| (3960/9000)*2600 | $1,144 | ||||
| Human Resources | |||||
| (220/308)*1400 | $1,000 | ||||
| (22/308)*1400 | $400 | ||||
| Total Departmental Costs | $12,956 | $9,044 | |||
| Total Costs to account for: | $ 22,000 | ||||
| b. | Allocate the Support Department Costs to the Production Department under the Step-down (Sequential) Allocation Method IT first sequentially: | ||||
| To: | |||||
| IT | HR | Clothing | Shoes | ||
| Departmental Costs | $2,600 | $1,400 | $10,500 | $7,500 | |
| From: | |||||
| Information Technology | -$2,600 | ||||
| (3000/12000)*2600 | $650 | ||||
| (5040/12000)*2600 | $1,092 | ||||
| (3960/12000)*2600 | $858 | ||||
| Human Resources | -$2,050 | ||||
| (220/308)*2050 | $1,464 | ||||
| (88/308)*2050 | $586 | ||||
| Total Departmental Costs | $0 | $0 | $13,056 | $8,944 | |
| Total Costs to account for: | $ 22,000 | ||||
| c. | Allocate the Support Department Costs to the Production Department under the Step-down (Sequential) Allocation Method HR first sequentially: | ||||
| To: | |||||
| HR | IT | Clothing | Shoes | ||
| Departmental Costs | $1,400 | $2,600 | $10,500 | $7,500 | |
| From: | |||||
| Human Resources | -$1,400 | ||||
| (92/400) _ $1,400 | $322 | ||||
| (220/400) _ $1,400 | $770 | ||||
| (88/400) _ $1,400 | $308 | ||||
| Information Technology | -$2,922 | ||||
| (5,040/9,000) _ $2,922 | $1,636 | ||||
| (3,960/9,000) _ $2,922 | $1,286 | ||||
| Total Departmental Costs | $0 | $0 | $12,906 | $9,094 | |
| Total Costs to account for: | $ 22,000 | ||||
| d. | Allocate the Support Department Costs to the Production Department under the Reciprocal Allocation Method: | ||||
| i. Assign reciprocal equations to the support departments | |||||
| IT=(2600+92 employees/400 employees*HR) | |||||
| IT = | $2,600+0.23HR | ||||
| HR = | ($1,400+.025 IT) | ||||
| HR=($1,400+3,000 hours/1,200 hours IT) | |||||
| ii. Solve the equation to complete the reciprocal costs of the support departments | |||||
| IT=$2,600+.023($1,400+0.25 IT) | |||||
| IT= $2,600+$322+0.0575IT | |||||
| 0.9425 IT = $2,922 | |||||
| IT = | $ 3,100 | ||||
| HR= $1,400+0.25 IT | |||||
| HR= $1,400+0.25(3,100) | |||||
| HR= $1,400+775 | |||||
| HR = | $2,175 | ||||
| iii. Allocate Reciprocal costs to departments (all numbers rounded to nearest dollar) | |||||
| IT | HR | Clothing | Shoes | ||
| Departmental Costs | $2,600 | $1,400 | $10,500 | $7,500 | |
| Information Technology | -$3,100 | ||||
| (3000/12000)*$3,100 | $775 | ||||
| (5040/12000)*$3,100 | $1,302 | ||||
| (3960/12000)*$3,100 | $1,023 | ||||
| Human Resources | -$2,175 | ||||
| (92/400)*$2,175 | $500 | ||||
| (220/400)*$2,175 | $1,196 | ||||
| (88/400)*$2,175 | $479 | ||||
| Total Departmental Costs | $0 | $0 | $12,998 | $9,002 | |
| $ 22,000 | |||||
| Reciprocal Method of Allocating Support Department Costs for Sportz, Inc. Using Repeated Iterations. | |||||
| Support Departments | Operating Departments | ||||
| IT | HR | Clothing | Shoes | ||
| Budgeted manufacturing overhead costs before any interdepartmental cost allocations | |||||
| 1st Allocation of IT Dept. | |||||
| (0.25, 0.42, 0.33)b | |||||
| 1st Allocation of HR Dept. | |||||
| 2nd Allocation of IT Dept. | |||||
| 2nd Allocation of HR Dept. | |||||
| 3rd Allocation of IT Dept. | |||||
| 3rd Allocation of HR Dept. | |||||
| 4th Allocation of IT Dept. | |||||
| Total budgeted manufacturing | |||||
| overhead of operating departments |
Solution
Solution:
Reciprocal method of allocation:
Service department cost = Direct Cost + Allocated Cost
IT Department Cost = $2,600 + [92 / (92+220+88)]* HR Cost
= $2,600 + 0.23*HR Cost
HR Cost = $1,400 + [3000 / (3000+5040+3960)]* IT Cost
= $1,400 + 0.25 * IT Cost
HR Cost = $1,400 + 0.25 ($2,600 + 0.23*HR Cost)
HR Cost = $1,400 + $650 + 0.0575*HR Cost
HR Cost = $2,050 / 0.9425 = $2,175
IT Cost = $2,600 + 0.23*$2,175 = $3,100
Total nos of IT hours = 12,000
If IT department outsources then company will save variable cost of $600 and 30% fixed cost i.e.$600 (2000*30%)
Hence total saving = 600 + 600 = $1,200
Cost of outsourcing = 12000 * 97.50 = $1,170,000
Hence net saving = 1.200 - 1170000 = - $1,168,800
There is loss on outsourcing of IT department, therefore Sportz should not outsource their IT deptt
| Cost Allocation - Direct method | ||||
| Particulars | HR | IT | Clothing | Shoes |
| Department Cost | $1,400.00 | $2,600.00 | $10,500.00 | $7,500.00 |
| Allocation of support department cost: | ||||
| HR (220:88) | -$1,400.00 | $1,000.00 | $400.00 | |
| IT (5040:3960) | -$2,600.00 | $1,456.00 | $1,144.00 | |
| Total | $0.00 | $0.00 | $12,956.00 | $9,044.00 |
