The accountants for Elliot, Inc. are preparing the operating departments overhead budgets. The Maintenance department direct costs are $12,000, and the Administration department direct costs are $54,000. The following data have been collected about use of services: Use the reciprocal method. The cost of Administration department after support cost allocations but before allocation to the operating departments is:
A) $58,800
B) $60,800
C) $60,000
D) $59,368

Question

The accountants for Elliot, Inc. are preparing the operating departments overhead budgets. The Maintenance department direct costs are $12,000, and the Administration department direct costs are $54,000. The following data have been collected about use of services:  Use the reciprocal method. The cost of Administration department after support cost allocations but before allocation to the operating departments is:
A) $58,800 
B) $60,800 
C) $60,000 
D) $59,368

Quizplus · Accepted Answer

First, we need to apply the reciprocal method by calculating the allocation rates.

For Maintenance department: 
Allocation rate = 50% / (50% + 20% + 30%) = 5/10 = 0.5

For Administration department: 
Allocation rate = 30% / (50% + 20% + 30%) = 3/10 = 0.3

We can now allocate the support costs to the operating departments:

Maintenance department overhead = $12,000 + ($54,000 x 0.2) = $12,000 + $10,800 = $22,800

Administration department overhead = $54,000 + ($12,000 x 0.5) = $60,000

Finally, we can calculate the cost of the Administration department after support cost allocations but before allocation to the operating departments:

$60,000 / 0.7 = $85,714.29

Therefore, the correct answer is C) $60,000.

The Accountants for Elliot, Inc