(Service department allocations) Computer Information Services is a computer soft¬ ware consulting company. Its three major functional areas are computer pro¬ gramming, information systems consulting, and software training. Carol Birch, a pricing analyst in the Accounting Department, has been asked to develop total costs for the functional areas. These costs will be used as a guide in pricing a new contract. In computing these costs, Birch is considering three different methods of allocating overhead costs: the direct method, the step method, and the algebraic method. Birch assembled the following data on overhead from the company’s two service departments: Information Systems and Facilities.

a. Using computer usage time as the application base for Information Systems and square feet of floor space for Facilities, apply overhead from these sendee departments to the production departments using (1) the direct method and (2) the step method.

b. Prepare a memo to company management that defines the algebraic method of allocating the costs of service departments and whether this method would be appropriate for Computer Information Services. Also discuss how Com¬ puter Information Sendees might better assign Information Systems’ costs.LO1

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SERVICE DEPARTMENTS INFORMATION SYSTEMS PRODUCTION DEPARTMENTS COMPUTER FACILITIES PROGRAMMING CONSULTING TRAINING TOTAL Budgeted overhead $50,000 Information Systems* $25,000 300 $75,000 $110,000 $85,000 $345,000 1,200 600 900 3,000 (hours) Facilities** 200 400 600 800 2,000 (thousand square feet)