Reference no: EM131666184

Question: Support-department cost allocations; single-department cost pools; direct, step-down, and reciprocal methods. Sportz, Inc., manufactures athletic shoes and athletic clothing for both amateur and professional athletes. The company has two product lines (clothing and shoes), which are produced in separate manufacturing facilities; however, both manufacturing facilities share the same support services for information technology and human resources. The following shows costs (in thousands) for each manufacturing facility and for each support department.

The total costs of the support departments (IT and HR) are allocated to the production departments (clothing and shoes) using a single rate based on the following:

Information technology              Number of IT labor-hours worked by department

Human resources                      Number of employees supported by department

Data on the bases, by department, are given as follows:

1. What are the total costs of the production departments (clothing and shoes) after the support-department costs of information technology and human resources have been allocated using

(a) the direct method,

(b) the step-down method (allocate information technology first),

(c) the step-down method (allocate human resources first), and

(d) the reciprocal method?

2. Assume that all of the work of the IT department could be outsourced to an independent company for $97.50 per hour. If Sportz no longer operated its own IT department, 30% of the fixed costs of the IT department could be eliminated. Should Sportz outsource its IT services?