The accountants for Brock, 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: Percent of Services Used By
Support Departments Operating Departments
Maint- Admin-
Enance istration Op1 Op2 Op3
Services Supplied By:
Maintenance -- 25% 50% 12.5% 12.5%
(based on square metres)
Administration 20% -- 40% 20% 20%
(based on number of employees)
Assume the reciprocal method. The equation to express the full cost of the Maintenance department is:
A)Maintenance = $12,000 + (0.50 × Administration)
B)Maintenance = $12,000 + (0.20 × $54,000)
C)Maintenance = $12,000 + (0.20 × Administration)
D)Maintenance = $12,000 + (0.25 × $54,000)

Question

Quizplus · Accepted Answer

The reciprocal method states that each service department's allocation should be based on the percentage of its service used by other departments, adjusted for any services it uses from other departments. 
For Maintenance department's allocation, we can calculate it using the following formula:
Maintenance department allocation = direct cost of Maintenance + (percentage of Maintenance used by Administration / (percentage of Maintenance used by Administration + percentage of Administration used by Maintenance)) x direct cost of Administration

Plugging in the given figures:
Maintenance department allocation = $12,000 + (0.20 / (0.20 + 0.50)) x $54,000
= $12,000 + (0.20 / 0.70) x $54,000
= $12,000 + 0.2857 x $54,000
= $12,000 + $15,428.57
= $27,428.57

Therefore, the equation to express the full cost of the Maintenance department is Maintenance = $12,000 + (0.20 × Administration), which is choice C.

The Accountants for Brock, Inc