Pomelo Company has two service department (1 and 2) and two operating (producing) departments (A and B).
Data provided are as follows:
Service Operating
Departments Departments
1 2 A B
Direct costs P150 P300 P5,000 P6,000
Services performed by Department 1 40% 40% 20%
Services performed by Department 2 20% 70% 10%
Assuming the direct method is used to allocate service department costs:
1. What is the service department cost allocated to Department B?
a. P50.00
b. P60.00
c. P87.50
d. P150.00
Allocated to Department B:
From department 1 cost (P150 x 20/60) P50.00
From department 2 cost (P300 x 10/80) 37.50
Total P 87.5 0
2. What is the total cost of Department A?
a. P5,000.00
b. P5,295.83
c. P5,362.50
d. P5,270.00
Direct cost P5,000
Allocated cost
From department 1 (P150 x 40/60) P100
From department 2 (P300 x 70/80) 262.50 362.50
Total cost of Dep’t A P5,362.50
Assuming the step-down method is used to allocate service department costs:
1. What is the service department costs allocated to Department B?
a. P60.00
b. P100.00
c. P75.00
d. P66.00
Under the step down method the service department with the highest costs is to be allocated first. The allocation is as follows:
Service Operating
Departments Departments
1 2 A B
Direct costs P150 P300
Allocation of:
Department 2 cost; 20:70:10 60 (300) P210 P30
Department 1 cost; 40 :20 (210) 140 70
Total 0 0 350 100
The cost allocated to Department B is therefore P100.
2. What is the total cost of Department A?
a. P5,375
b. P5,350
c. P5,075
d. P5,270
Direct costs P5,000
Allocated costs (refer to number 37) 350
Total cost of Dep’t A P5,350
Assuming the reciprocal method is used to allocate service department costs:
1. What is the service department cost allocated to Department B (rounded)?
a. P60.00
b. P75.00
c. P84.78
d. P135.00
Step 1: Let D1 be the complete reciprocated costs of Department 1 and D2 the complete reciprocated costs of Department 2. We then express the data
as follows:
D1 = P150 + .20D2
D2 = P300 + .40D1
The .20 D2 in equation (1) is the percentage of Department 2 services used by Department 1. The .40 D1 in equation (2) is the percentage of the
Department 1 used by Department 2. By complete reciprocated costs in equations (1) and (2), we mean the Department 1’s own costs plus any
interdepartmental cost allocations.
Step 2: Solve the Set of Linear Equations to Obtain the Complete Reciprocated Costs of Each Service Department. Substituting equation (2) into (1):
D1 =P150 = [.20(P300 + .40D1)]
D1 =P150 + 60 + .08D1
.92D1 = P210
D1 = P228.26
Substituting into equation (2)
D2 =P300 + .40(P228.26)
D2 =P300 + 91.30
D2 =P391.30
Step 3: Allocate the Complete Reciprocated Costs of Each Service Departments to All Other Departments (Both Service Departments and Operating
Departments) on the Basis of the Usage Percentages. The allocation is as follows:
Service Operating
Departments Departments
1 2 A B
Direct costs P150 P300
Allocation of Dept. 1, 40:40:20 (228.26) 91.30 P91.30 P45.65
Allocation of Dept. 2, 20:70:10 78.26 (391.30) 273.91 39.13
Total allocations P365.21 P84.78
2. What is the total cost of Department A (rounded)?
a. P5,365.00
b. P5,087.00
c. P5,375.00
d. P5,085.00
Total cost of Department A:
Direct costs P5,000
Allocated costs 365.22
Total P5,365.22
J &J Company has two service departments (SS1 and SS2) and two productions departments (PP1 and PP2). Departmental data for January were as
follows:
SS1 SS2
Costs incurred P27,000 P18,000
Services provided to:
SS1 - 20%
SS2 10% -
PP1 50% 30%
PP2 40% 50%
What is the total allocated service departmental costs to PP2 if the company uses the reciprocal method of allocating the service department costs?
(Round computations to the nearest whole number). a. P19,800
P21,949
P22,500
P23,051
The reciprocal method allocates service department costs to other service departments as well as to production departments by means of simultaneous
equations, as shown below.
Thus, total service cost allocated to PP2 is P23,051 [(40% x P31,224) + (50% x P21,122)].
SS1 = P27,000 + .2 SS2
27,000 + [.2 (18,000 + .1 SS1)]
27,000 + 3,600 + .02 SS1
.98 SS1= P30,600
SS1= P31,224
SS2= P18,000 + .1 (P31,224)
= P21,122
