Phoenix Partners provides management consulting services to government and corporate clients. Phoenix has two support departmentsadministrative services (AS) and information systems (IS) and two operating departments-government consulting (GOVT) and corporate consulting (CORP). For the first quarter of 2017, Phoenix's cost records indicate the following: E: (Click the icon to view the cost records.) The two support departments' costs have been allocated to the two operating departments using the direct method and the step-down method (AS department first) and the step-down method (IS department first). The results of the allocations are as follows: (Click the icon to view the direct method.) (Click the icon to view the step-down method (AS first).) (Click the icon to view the step-down method (IS first).) (Click the icon to view a summary of the three methods.) Read the requirements Data table SUPPORT OPERATING AS IS GOVT CORP Total $ 600,000 $ 2,400,000 $ 8,756,000 $ 12,452,000 $ 24,208,000 Budgeted overhead costs before any interdepartment cost allocations Support work supplied by AS (budgeted head count) Support work supplied by IS (budgeted computer time) 0 25% 40% 35% 100% 10% 0 30% 60% 100% 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? - Direct method Support Departments Operating Departments Direct Method AS IS GOVT CORP Total Budgeted overhead costs before interdepartment cost allocations Allocation of AS costs $ 600,000 $2,400,000 $ 8,756,000 $ (600,000) 320,000 (2,400,000) 800,000 12,452,000 $ 24,208,000 280,000 1,600,000 Allocation of IS costs $ 0 $ 0 $ 9,876,000 $ 14,332,000 $ 24,208,000 Total budgeted overhead of operating departments Step-down method (AS first) Support Departments Operating Departments AS IS GOVT CORP Total Step-down Method Budgeted overhead costs before interdepartment cost allocations $ 8,756,000 $ 12,452,000 $ 24,208,000 600,000 $ 2,400,000 $ (600,000) 150,000 Allocation of AS costs 240,000 210,000 $ 0 2,550,000 (2,550,000) Allocation of IS costs 850,000 1,700,000 $ 0 $ 9,846,000 $ 14,362,000 $ 24,208,000 Total budgeted overhead of operating departments Step-down method (IS first) Support Departments Operating Departments AS IS GOVT CORP Total Step-down Method Budgeted overhead costs before interdepartment cost allocations $ 600,000 $ 12,452,000 $ 24,208,000 2,400,000 $ 8,756,000 $ (2,400,000) 720,000 240.000 Allocation of IS costs 1,440,000 0 $ 840,000 (840,000) Allocation of AS costs 448,000 392,000 $ 0 $ 9,924,000 $ 14,284,000 $ 24,208,000 Total budgeted overhead of operating departments Reference GOVT CORP $ 1,880,000 Direct method Step-down (AS first) Step-down (IS first) 1,120,000 $ 1,090,000 1,910,000 1,168,000 1,832,000
