Anthony’s Orchard
Washington State
29 September 2018
To: Chief Financial Officer
From: Accounting Manager
Subject: Allocation Methods
Anthony’s orchard as an apple producing farm needs to come up with proactive approaches in making financial decisions. Most important in financial decision is implementing the most effective cost allocation method when allocating departmental costs. In a bid to do so, there is need to calculate and analyze the three methods of costs allocation using Anthony orchards data to determine the most effective method for cost allocation. Therefore, below is an analysis of Anthony’s Orchards data on cost allocation using direct, step and reciprocal methods of allocation with an explanation of the selected method is appropriate.
Direct allocation method
The direct method of allocating costs allocates service departments cost to the operation departments according to the cost driver. Service departments cost for other service departments are ignored (Lumen Learning, n.d).
Delegate your assignment to our experts and they will do the rest.
|
Cost in $ |
||||
| Direct Allocation method | Prepared Apple | Pick your own apple | Community event | Total |
| Technology | 143,333.33 | 107,500 | 179,166.67 | 430,000 |
| Marketing | 90,000 | 90,000 | 120,000 | 300,000 |
| Executive team | 120,000 | 80,000 | 100,000 | 300,000 |
| Finance | 35,000 | 116,666.67 | 23,333.33 | 175,000 |
| Facilities | 66,666.67 | 33,333.33 | 25,000 | 125,000 |
| Procurement | 30,000 | 30,000 | 15,000 | 75,000 |
| Total | 485,000 | 457,5000 | 462,5000 | 1,405,000 |
Step down methods
The step method allocates service departments cost to operation departments and other service departments in sequence. Service departments with highest costs are allocated first and the trend is maintained until all service departments’ costs are allocated (Lumen Learning, n.d)
|
Cost in $ |
||||||||||
| Technology | Executive | Finance | Facilities | Procurement | Marketing | Prepared apple | Pick Your own | Community | ||
| Cost before allocation |
430,000 |
300,000 |
175,000 |
125,000 |
75,000 |
300,000 |
- |
- |
- |
|
| Allocate Technology |
(430,000) |
21,500 |
43,000 |
21,500 |
21,500 |
64,500 |
86,000 |
64,500 |
107,500 |
|
| Allocate executive |
- |
(321,500) |
16,921.05 |
16,921.05 |
16,921.05 |
16,921.05 |
101,526.32 |
67,684.21 |
84,605.26 |
|
| Allocate Finance |
(234,921.05) |
13,051.17 |
13,051.17 |
13,051.17 |
39,153.51 |
130,511.70 |
26,102.34 |
|||
| Allocate procurement |
(176,472) |
10,380.72 |
10,380.72 |
83,045.75 |
41,522.88 |
31,142.16 |
||||
| Allocate marketing |
- |
(136,853) |
8,553.31 |
51,319.85 |
51,319.85 |
25,659.93 |
||||
|
- |
(413,406) |
124,021.88 |
124,021.88 |
165,362.50 |
||||||
| Total |
- |
485,067 |
479,561 |
440,372 |
1,405,000 |
|||||
Reciprocal method
The reciprocal method is the most precise way of allocating costs. However the method is complicated and takes a lot of time to compute. Reciprocal methods take into account all costs allocations including service departments costs (Lumen Learning, n.d)
|
Service Departments (Cost in $) |
Operations departments (Cost in $) |
|||||||||
| Technology | Marketing | Executive | Finance | Facilities | procurement | Prepared apple | Pick your own | Community event | Total | |
| Direct costs | 430,000 | 300,000 | 300,000 | 175,000 | 125,000 | 75,000 | 5,909,619 | 1,909,575 | 1,287,708 | 10,511,902 |
| Procurement | 3,750 | 3,750 | 3,750 | 3,750 | 3,750 | (75,000) | 22,500 | 22,500 | 11,250 | - |
| Facilities | 6250 | 6,250 | 6,250 | 6,250 | (125,000) | 6.250 | 50,000 | 25,000 | 18,750 | - |
| Finance | 8750 | 8,750 | 8,750 | (175,000) | 8,750 | 8,750 | 26,250 | 87,500 | 17,500 | - |
| Executive | 15,000 | 15,000 | (300,000) | 15,000 | 15,000 | 15,000 | 90,000 | 60,000 | 75,000 | - |
| Marketing | - | (300,000) | - | - | - | - | 90,000 | 90,000 | 120,000 | - |
| technology | (430,000) | 64,500 | 21,500 | 43,000 | 21,500 | 21,500 | 86,000 | 64,500 | 107,5000 | - |
| 33,750 | 98,250 | 40,250 | 68,000 | 49,000 | 51,500 | 364,750 | 349,500 | 350,000 | 1,405,000 | |
As illustrated above, looking at the three methods of allocating costs the reciprocal method takes into account all cost from both service and operating cost. Although complex, the method is recommendable for decision making as it ensures all costs are taken into account leaving no room for oversight (Lumen Learning, n.d). Therefore, I would recommend the reciprocal method since it estimates opportunity costs as opposed to other allocation methods.
References
Anthony's Orchard. (n.d.). Budgets. Retrieved on 29 September 2018 from http://mym.cdn.laureate-media.com/2dett4d/Walden/ACCT/6130/mm/anthony_orchard_website/budgets.htm
Lumen learning (n.d). Managerial Accounting: Service department allocation . Retrieved on 29 September 2018 from https://courses.lumenlearning.com/tcc-managacct/chapter/direct-method-of-allocation/
