14.24 Direct and step-down allocation. E-books, an online book retailer, has two operating divisions- corporate sales and consumers sales- and two support divisions-human resources and information systems. Each sales division conducts merchandising and marketing operating independently. E-books use a number of employees to allocate human resources costs and processing time to allocate information systems costs. The following data are available for September 2018:

Support Division Operating Division

Human Resources Information System Corporate Sales Consumer Sales

Budgeted costs incurred before any inter-division cost allocations $ 82,700 $234,400 $998,270 $489,860

Support work supplies by human resources division:

Budgeted number of employees -- 21 42 28

Support work supplied by information system division:

Budgeted processing time (minutes) 320 -- 1,920 1,600

Required:

1. Allocate the support divisions' costs to the operating divisions using the direct method.

2. Rank the support divisions based on the percentage of their services provided to other support divisions. Use this ranking to allocate the support divisions costs to the operating divisions based on the step-down method.

3. How could you have ranked the support divisions differently?

14.25 Reciprocal cost allocation (continuation of Excercise 14.24).

Required:

1. Describe the key features of the reciprocal method.

2. Allocate the support divisions' costs ( human resources and information system) to the two operating divisions using the reciprocal method.

3. In the case presented in this exercise, which method (direct, step-down, or reciprocal) would you recommend? Why?