The Accountants at King Industries Want to Determine the Amount

question 10

Essay

The accountants at King Industries want to determine the amount of support department costs that should be allocated to its operating departments. Actual support costs and allocation base information for the two support departments is shown below. The costs of support department S1 are allocated based on the number of service calls made, and the costs of support department S2 are allocated based on square metres.
Support Departments Operating Departments
S1 S2 O1 O2
Direct support costs $73,000 $35,000 ---- ----
Allocation bases:
Service calls 3 5 9 6
Square metres 5,000 2,000 25,000 20,000
Using the reciprocal method:
a)Determine the equations for allocating S1 and S2 costs
b)Determine the amount of cost allocated from S2 to S1
c)Determine the amount of cost allocated from S1 to O2
d)Determine the total support department costs allocated to the operating departments

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Definitions:

Deductibles

The amount paid out of pocket by the policyholder before an insurance policy begins to cover expenses.

Consumer Surplus

The difference between the maximum price a consumer is (or consumers are) willing to pay for an additional unit of a product and its market price; the triangular area below the demand curve and above the market price.

Willing To Pay

The maximum amount an individual is prepared to spend to purchase a good or service or to avoid something undesirable.

Moral Hazard

A situation in economics where one party is willing to take risks because the costs that could result will not be borne by that party.