BluStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations follows:

Administration Accounting Domestic International

Employees - 27 55 18

Transactions 37,000 - 20,000 80,000

Department direct costs $356,000 $149,000 $955,000 $3,650,000

Required:

(a) Allocate the cost of the service departments to the operating departments using the direct method.

(b) Allocate the cost of the service departments to the operating departments using the step method. Start with Administration.

a.

Direct Method

                         Administration   Accounting    Domestic    International

Employees -                                       27                     55                  18

Transactions          37,000                 -                   20,000         80,000

Direct costs           $356,000        $149,000      $955,000   $3,650,000

Allocation

Admin. cost          -$356,000                              $268,219    $87,781

Accounting Cost                            $149,000      $29,800     $119,200

Total                        $0                    $0               $1,253,019   $3,856,981

b.

Step Method

                         Administration   Accounting    Domestic    International

Employees -                                       27                     55                  18

Transactions          37,000                 -                   20,000         80,000

Direct costs           $356,000        $149,000      $955,000   $3,650,000

Allocation

Admin. cost          -$356,000        $160,200      $89,000     $106,800

Total                        $0                    $309,200    $1,044,000 $3,756,800

Accounting             $0                   -$309,200    $61,840       $247,360

Total                        $0                    $0                 $1,105,840  $4,004,160

Explanation:

a.

Admin cost will be allocated on the basis of Number of employee in each operating department.

Administrative Cost = $356,000 / (55 + 18) = $4,876.71 per employee

Domestic = 55 x $4,876.71 = $268,219

International = 18 x $4,876.71 = $87,781

Accounting cost will be allocated on the basis of Number of transactions in each operating department.

Accounting Cost = $149,000 / (20,000 + 80,000) = $1.49 per transaction

Domestic = 20,000 x $1.49 = $29,800

International = 80,000 x $1.49 = $119,200

b.

Administrative cost

Total Employees = 27 + 15 + 18 = 60 employees

Admin cost will be allocated on the basis of Number of employee in each operating department.

Accounting = $356,000 x 27/60 = $160,200

Domestic = $356,000 x 15/60 = $89,000

International =$356,000 x 18/60 = $106,800

Accounting cost will be allocated on the basis of Number of transactions in each operating department.

Domestic = $309,200 x 20,000 / 100,000 = $61,840

International = $309,200 x 80,000 / 100,000= $247,360

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