The Legal Department (LE) and Human Resources Department (HR) of the XXX Corporation support the operations of Divisions A and B of the XXX Corporation. The total cost incurred by the Legal Department in supporting A and B is $2,000,000. The total cost incurred by the Human Resources Department in supporting A and B is $10,000,000. The Legal Department devotes 400 Person-Hours (PH) to support Division A, 600 PH to support division B, and 100 PH to support the Human Resources Department. The Human Resources Department devotes 1,000 PH to support Division A,

2000 PH to support Division B and 200 PH to support the Legal Department.

The XXX Corporation considers two methods to allocate the support costs of the Legal Department and the Human Resources Department to Divisions A and B. The first allocation method is known as the Direct Allocation Method. This method ignores the exchange of support services between the Legal Department and the Human Resources Department, and proceeds to allocate all legal and human resources support costs directly to the operating divisions A and B. The second allocation method is known as the Reciprocal Allocation Method. This method, in allocating support costs to the operating departments, incorporates reciprocal cost allocations for support services exchanged between the Legal and Human Resources Departments.

The CFO of Corporation XXX decides that the number of Person Hours (PH) devoted by the each support department to service the other units will be used as the allocation base or cost driver.

REQUIREMENTS: Please consult your textbook about the direct and reciprocal allocation methods before you address the following requirements:

1. Allocate support costs to the operating divisions using the Direct and Reciprocal Allocation Methods. Which allocation method would you recommend?
2. How would you design Activity Based Costing (ABC) for this allocation?
3. If you, as the CFO of XXX would allow all the operating and support units involved to negotiate transfer prices for the services they exchange (transfer) among each other how would you structure and regulate such a system?