QUESTION 6 - Service department cost allocation (13 marks)

Chan Kwan LLP is a law firm that specializes in working with business clients. Lily Li, the firm's controller assesses the manager of each of its departments on their ability to control costs. As such, he wants to properly allocate the costs of their two major service departments, Human resources, and Office services to their two production departments, Litigation and Corporate.

It should be noted that Human resources and Office services also provide services to each other. Human resources costs are allocated based on the number of employees in each department and Office services costs are allocated based on the hours of service provided to each department. Department costs, along with the hours of service provided and the number of employees that worked in each department during April are provided below.

April Data

Human resources

Office services

Litigation department

Corporate department

Budgeted costs

$376,200

$629,500

$1,170,000

$1,335,000

Actual costs

$381,600

$609,650

$1,233,600

$1,152,000

Actual hours of service provided

3,060

6,000

5,440

8,500

Actual number of employees

10

21

15

24

Required:

Allocate the costs of the service departments to the production departments. The resulting schedules will include the total cost of operating the Litigation department and the Corporate department for April using the appropriate figures.

Apply the costs using the following methods:

a.The direct method. (3 marks)

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b.The reciprocal method. (5 marks)

c. Lily Li, the controller of Chan Kwan LLP, would like your recommendation on whether they should use the Direct or Reciprocal method of support department cost allocation. Back up your recommendation with a discussion of the advantages and disadvantages of both methods and the reasons for your recommendation. Remember to use pertinent figures from your quantitative analysis. (5 marks).