Q2. Support Department Cost Allocation – direct, step-down and reciprocal methods
Samuel and Stevens Brokerage firm is organised around two major sales divisions: institutional clients and retail clients. The firm also has two support departments: research and administration. The research department’s costs are allocated to the other departments based on a log of hours spent on tasks for each user. The administration department’s costs are allocated based on the number of employees in each department.
Records are available for last period as follows:
Support departments Operating departments Research Administration Institutional Retail Payroll costs Other costs $300,000 $200,000 $250,000 $120,000 $350,000 $ 90,000 $500,000 $210,000 Research hours 100 200 400 250 Number of employees 8 11 9 10
Required (show all workings and round all allocation ratios to at least four decimal points, where applicable):
1. Allocate the support department costs using the direct method.
2. Allocate the support department costs using the step-down method. Briefly outline the criteria, which could determine the sequence for allocating support department costs using the step-down method. Allocate the support department costs using the ‘magnitude of costs’ criterion.
3. Allocate the support department costs using the reciprocal method.
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