1/2) Using computer usage time as the application base for the Information ... application of overhead from the service
CIS – Overhead
1/2) Using computer usage time as the application base for the Information Systems Department and square feet of floor space for the Facilities Department, the application of overhead from the service departments under the Direct and Step Methods, are presented below. Direct Method Service Departments IS Budgeted overhead
$50,000
Production Departments
Facilities
Programming
$25,000
Consulting
Training
$75,000
$110,000
$85,000
12/27
6/27
9/27
$22,222
$11,111
$16,667
4/18
6/18
8/18
$5,556
$8,333
$11,111
$102,778
$129,444
$112,778
Proportion of service furnished: By IS:
(1)
IS Allocation By Facilities:
($50,000)
(2)
Fac. Allocation
($25,000)
Totals (1)
Allocated on the basis of 2,700 hours of computer usage.
(2)
Allocated on the basis of 1,800 thousand square feet of floor space.
Step Method Service Departments IS Budgeted overhead
$50,000
Production Departments
Facilities
Programming
Consulting
Training
$25,000
$75,000
$110,000
$85,000
3/30
12/30
6/30
9/30
$5,000
$20,000
$10,000
$15,000
4/18
6/18
8/18
$6,667
$10,000
$13,333
$101,667
$130,000
$113,333
Proportion of service furnished: By IS:
(1)
IS Allocation By Facilities:
($50,000)
(2)
Fac. Allocation
($30,000)
Totals (1)
Allocated on the basis of 3,000 hours of computer usage.
(2)
Allocated on the basis of 1,800 thousand square feet of floor space.
3)
The reciprocal allocation method allocates costs by including the services that the service departments provide each other. Thus, the overhead to be allocated includes each service department’s direct costs as well as the costs of services obtained from the other service department. This method provides a more accurate and equitable allocation of costs as costs are allocated using simultaneous equations.
CIS – Overhead
4)
Theoretically, the reciprocal method would be appropriate in this situation. Since the Information Systems Department and the Facilities Department provide services to each other there is a reciprocal relationship between the two. However. The reciprocal method is a more complex method. Therefore, it might be more efficient to use a simpler method even though the reciprocal allocation could easily be computed using a computer and an appropriate software package.
