Manhattan Partners provides management consulting services to government and corporate clients.Manhattanhas two support departmentsadministrative services (AS) and information systems (IS)and two operating departmentsgovernment consulting (GOVT) and corporate consulting (CORP). For the first quarter of 2013, Manhattan's cost records indicate the following:

	SUPPORT			OPERATING
	AS	IS		GOVT	CORP	Total
Budgeted overhead costs before any
interdepartment cost allocations	$300,000	$3,000,000		$8,850,000	$12,420,000	$24,570,000
Support work supplied by AS
(budgeted head count)	---	25%		45%	30%	100%
Support work supplied by IS
(budgeted computer time)	10%	---		27%	63%	100%

The two support departments' costs have been allocated to the two operating departments using the direct method and the step-down method (AS departmentfirst) and the step-down method (IS department first). The results of the allocations are as follows:

	Support Departments		Operating Departments
Direct Method	AS	IS	GOVT	CORP	Total
Budgeted overhead costs
before interdepartment cost allocations	$300,000	$3,000,000	$8,850,000	$12,420,000	$24,570,000
Allocation of AS costs	(300,000)		180,000	120,000
Allocation of IS costs		(3,000,000)	900,000	2,100,000
Total budgeted overhead of operating departments	$0	$0	$9,930,000	$14,640,000	$24,570,000

	Support Departments		Operating Departments
Step-down Method	AS	IS	GOVT	CORP	Total
Budgeted overhead costs
before interdepartment cost allocations	$300,000	$3,000,000	$8,850,000	$12,420,000	$24,570,000
Allocation of AS costs	(300,000)	75,000	135,000	90,000
	$0	3,075,000
Allocation of IS costs		(3,075,000)	922,500	2,152,500
Total budgeted overhead of operating departments		$0	$9,907,500	$14,662,500	$24,570,000

	Support Departments		Operating Departments
Step-down Method	AS	IS	GOVT	CORP	Total
Budgeted overhead costs
before interdepartment cost allocations	$300,000	$3,000,000	$8,850,000	$12,420,000	$24,570,000
Allocation of IS costs	300,000	(3,000,000)	810,000	1,890,000
	$600,000	$0
Allocation of AS costs	(600,000)		360,000	240,000
Total budgeted overhead of operating departments	$0		$10,020,000	$14,550,000	$24,570,000

	GOVT	CORP
Direct method	$1,080,000	$2,220,000
Step-down (AS first)	1,057,500	2,242,500
Step-down (IS first)	1,170,000	2,130,000

Requirments

1.	Allocate the two support departments' costs to the two operating departments using the reciprocal method. Use (a) linear equation and (b) repeated iterations.
2.	Compare and explain differences in requirement 1 with those of the direct method and the step down method. Which method do you prefer? Why?

Requirement 1a. Allocate the two support departments' costs to the two operating departments using the reciprocal method.

First, determine the linear equations for each support department.

AS=		+
IS=		+