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Lecture 14

ADM 3346 Lecture Notes - Lecture 14: Management Consulting


Department
Administration
Course Code
ADM 3346
Professor
Tiemei L I
Lecture
14

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DGDs of ADM3346
Cost Accounting
Question 9
Phoenix Partners provides management consulting services to government and corporate
clients. Phoenix has two support departments Administrative Services (AS) and
Information Systems (IS) and two operating departments Government Consulting
(Govt.) and Corporate Consulting (Corp.). For the first quarter of 2010, Phoenix’s cost
records indicate the following:
Support
Operating
AS
IS
Govt.
Corp.
Total
Budgeted overhead costs
before any
interdepartment cost
allocations
Support work supplied by
AS (budgeted head
count)
Support work supplied by
IS (budgeted computer
time)
$600,000
___
10%
$2,400,000
25%
___
$8,756,000
40%
30%
$12,452,000
35%
60%
$24,208,000
100%
100%
Required:
1. If the step-down method were used to allocate service department costs what would be
the order of allocation. Compute the costs of all departments after the allocations to user
departments. Show calculations and explain.
2. If the reciprocal method were used, what would be the total reciprocated cost to be
allocated from each service department there is no need to provide the allocations.
3. Explain two advantages of the reciprocal vs other methods of service department cost
allocation.
Solutions
1. Step-Down Method
Recognizes the cost of services provided by one support department to another
Allocate support costs to other support departments and operating departments in a
ranked order
Can be ranked by percentage of service or the dollar value of service provided to other
departments
Lacks simplicity, economic plausibility
AS to IS = 600,000 * 0.25 = 150,000
IS to AS = 2,400,000 * 0.1 = 240,000
Since cost transferred from IS to AS is bigger, IS is ranked first.
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