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Tech Books an online book retailer, has two operating departmentscorporate sales and consumer salesand two support departmentshuman resources and information systems. Each sales department conducts merchandising and marketing operations independently. Tech Books uses number of employees to allocate human resources costs and processing time to allocate information systems costs. The controller of Tech Books reads a widely used textbook that states that "the reciprocal method is conceptually the most defensible." He seeks your assistance. The following data are available for September 2017:

Support Departments Operating Department

Human Resources Information Systems Corporate Sales Consumer Sales

Budgeted costs incurred before any interdepartment cost allocations $90,000 $227,000 $996,000 $483,000

Support work supplied by human resources department

Budgeted number of employees 20 44 36

Support work supplied by information systems department

Budgeted processing time (in minutes) 400 2,520 1,080

Support Departments Operating Departments

Human Resources Information Systems Corporate Sales Consumer Sales

Budgeted costs incurred before any interdepartment cost allocations $90,000 $227,000 $996,000 $483,000

Support work supplied by human resources department

Budgeted number of employees 20 44 36

Support work supplied by information systems department

Budgeted processing time (in minutes) 400 2,520 1,080

Direct Allocation data

	Support Departments		Operating Departments
	HR	Info. Systems	Corporate	Consumer	Total
Costs incurred	$90,000	$227,000	$996,000	$483,000	$1,796,000
Allocation of HR costs	(90,000)		49,500	40,500
Allocation of Info. Systems costs		(227,000)	158,900	68,100
Total budgeted costs of operating departments	$0	$0	$1,204,400	$591,600	$1,796,000

Step-down allocation data

Support Departments		Operating Departments
	HR	Info. Systems	Corporate	Consumer	Total
Costs incurred	$90,000	$227,000	$996,000	$483,000	$1,796,000
Allocation of HR costs	(90,000)	18,000	39,600	32,400
	$0	245,000
Allocation of Info. Systems costs		(245,000)	171,500	73,500
Total budgeted costs of operating departments		$0	$1,207,100	$588,900	$1,796,000

*Proportions for services provided to other support departments: human resources (HR),

0.20000; information systems (IS), 0.10000.

Requirements

1.	Describe the key features of the reciprocal method.
2.	Allocate the support departments' costs (human resources and information systems) to the two operating departments using the reciprocal method. Use (a) linear equations and (b) repeated iterations.
3.	In the case presented in this exercise, which method (direct, step-down, or reciprocal) would you recommend? Why?

Requirement 1. Describe the key features of the reciprocal method.

The reciprocal allocation method explicitly includes the mutual services provided among all support departments

. Interdepartmental relationships are fully incorporated into the support department cost allocations.

Requirement 2. Allocate the support departments' costs (human resources and information systems) to the two operating departments using the reciprocal method.

Before we can allocate the support departments' costs to the two operating departments using the reciprocal method, let's first determine the linear equations for each support department. Then off-line solve for HR and IS (Information Systems), so that you may complete the allocation of the support departments' costs. (Abbreviations used: HR = human resources; IS = information system.)

HR=	$90,000	+	0.10000	IS
IS=	$227,000	+	0.20000	HR

Now allocate the support departments' costs (human resources and information systems) to the two operating departments using the reciprocal method. (Round proportions to five decimal places, .XXXXX, and your final answers to the nearest whole dollar. Use parentheses or a minus sign when decreasing departments by allocating costs. Enter a "0" for zero balances.)

	Support Departments		Operating Departments
	HR	Info. Systems	Corporate	Consumer	Total
Costs incurred	$90,000	$227,000	$996,000	$483,000	$1,796,000
Allocation of HR costs	(115,000)	23,000	50,600	41,400
Allocation of Info. Systems costs	25,000	(250,000)	157,500	67,500
Total budgeted costs of operating departments	$0	$0	$1,204,100	$591,900	$1,796,000

This time, use repeated iterations. (Round your final answers to the nearest whole dollar. Use parentheses or a minus sign when decreasing departments by allocating costs. Enter a "0" for any zero balances.)

	Support Departments		Operating Departments
Reciprocal Method	HR	Info. Systems	Corporate	Consumer	Total
Budgeted overhead costs
before interdepartment cost allocations
First allocation of HR costs
First allocation of Info. Systems costs
Second allocation of HR costs
Second allocation of Info. Systems costs