Abound Company has two support departments (S1 and S2) and two producing departments (X and Y). Department S1 serves Departments S2, X, and Y in the following percentages, respectively: 10%, 35%, 55%. Department S2 serves Departments S1, X, and Y in the following percentages, respectively: 6%, 50%, and 44%. Direct department costs for S1, S2, X, and Y are $15,000, $8,000, $105,000, and $97,500, respectively.
What are the total costs to be allocated from Department S1?
A)$15,573
B)$800
C)$9,500
D)$15,000

Question

Quizplus · Accepted Answer

To allocate costs, we need to use the reciprocal method.

First, we need to calculate the amount of service provided by each support department to the other departments:

S1 to S2: 10%
S1 to X: 35%
S1 to Y: 55%
S2 to S1: 6%
S2 to X: 50%
S2 to Y: 44%

Next, we allocate the support department costs based on the percentages of service provided.

For S1: 
Allocated cost = ($15,000 + (0.06 x $8,000)) / (1 - 0.1) 
Allocated cost = $15,573

For S2: 
Allocated cost = ($8,000 + (0.1 x $15,573)) / (1 - 0.06) 
Allocated cost = $8,601

For X: 
Allocated cost = ($105,000 + (0.35 x $15,573) + (0.5 x $8,601)) / (1 - 0.5 - 0.44) 
Allocated cost = $68,157

For Y: 
Allocated cost = ($97,500 + (0.55 x $15,573) + (0.44 x $8,601)) / (1 - 0.5 - 0.44) 
Allocated cost = $80,201

Therefore, the total costs to be allocated from Department S1 is $15,573, which is option A.

Abound Company Has Two Support Departments (S1 and S2) and Two