Austin Partners provides management consulting services to g

Austin Partners provides management consulting services to government and corporate clients.

Austin has two support departments —administrative services (AS) and information systems (IS)—and

two operating departments—government consulting (GOVT) and corporate consulting (CORP). For the first quarter of 2013, Austin\'s cost records indicate the following:

SUPPORT

OPERATING

AS

IS

GOVT

CORP

Total

Budgeted overhead costs before any

interdepartment cost allocations

$690,000

$1,800,000

$7,325,000

$12,550,000

$22,365,000

Support work supplied by AS

(budgeted head count)

---

20%

52%

28%

100%

Support work supplied by IS

(budgeted computer time)

10%

---

36%

54%

100%

1.

Allocate the two support departments\' costs to the two operating departments using the following methods:

a.

Direct method

b.

Step-down method (Allocate AS first)

c.

Step-down method (Allocate IS first)

2.

Compare and explain differences in the support-department costs allocated to each operating department.

3.

What approaches might be used to decide the sequence in which to allocate support departments when using the step-down method?

	SUPPORT		OPERATING
	AS	IS		GOVT	CORP	Total
Budgeted overhead costs before any
interdepartment cost allocations	$690,000	$1,800,000		$7,325,000	$12,550,000	$22,365,000
Support work supplied by AS
(budgeted head count)	---	20%		52%	28%	100%
Support work supplied by IS
(budgeted computer time)	10%	---		36%	54%	100%

Solution

1 AS IS Govt Corp Total a. Direct method: Costs 690000 1800000 AS cost allocation (52/80,28/80) -690000 448500 241500 690000 IS cost allocation (36/90,54/90) -1800000 720000 1080000 1800000 0 0 1168500 1321500 2490000 b. Step-Down method (Allocate AS First) Costs 690000 1800000 AS cost allocation (20/100,52/100,28/100) -690000 138000 358800 193200 690000 IS cost allocation (36/90,54/90) -1938000 775200 1162800 1938000 0 0 1134000 1356000 2628000 c. Step-Down method (Allocate IS First) Costs 690000 1800000 IS cost allocation (10/100,36/100,54/100) 180000 -1800000 648000 972000 1800000 AS cost allocation (52/80,28/80) -870000 0 565500 304500 870000 0 0 1213500 1276500 2670000 2 Cost allocated to Govt Corp Direct method: 1168500 1321500 Step-Down method (Allocate AS First) 1134000 1356000 Step-Down method (Allocate IS First) 1213500 1276500 For Govt,Higher cost is under step down method (Allocate IS first).Lower cost under step down method (Allocate AS first) For Corp,Higher cost is under step down method (Allocate AS first).Lower cost under step down method (Allocate IS first) Direct method ignores Services provided to supporting departments Step-down method partially recognises services provided to supporting departments 3 Approaches to decide the sequence in which to allocate support departments when using the step-downmethod: a) On the basis of % of services provided to supporting departments Rank 1 AS 25% 2 IS 10% b) on the basis of $ value of services provided to supporting departments: Rank 1 IS 180000 (1800000*0.10) 2 AS 138000 (690000*0.20) c) On the basis of cost in support department: Rank 1 IS 1800000 2 AS 690000