Lothrop Security Group (LSG) provides consulting and security services to various clients, including government agencies and commercial firms. It has two operating departments, Government and Commercial. The Government Department handles contracts with federal and state organizations, and Commercial serves the remaining customers. LSG is organized this way because of the differences in contractual arrangements. Government contracts call for a fee equal to the full cost of the job, including allocated overhead plus a fixed profit amount. Other clients are charged based on the current market environment. LSG has two service departments, Contracts and Information Systems (IS). Contracts Department costs are allocated based on number of contracts, and IS costs are allocated based on employees. Selected percentage use data as well as departmental direct costs follow:

Required

a. Suppose LSG allocated service department costs using the direct method. What is the amount of service department costs that will be allocated to each of the operating departments?

b. Suppose that, after reviewing the results, the CFO tells the accountant to change the percentage of classification of contracts so 50 percent is shown as used by the Government Department and 40 percent is shown as used by the Commercial Department. Would this be ethical?

c. Suppose the CFO tells the accountant to use salaries instead of number of employees to allocate IS Department cost. Employees in the Commercial Department earn lower salaries, on average. Would this be ethical?

d. Although LSG’s current policy is to allocate service department costs using the direct method, the CFO asks the accountant to allocate the costs using the step method, allocating Information Services Department costs first. What is the amount of service department costs that will be allocated to each of the operating departments?

e. The CFO next asks the accountant to allocate the costs using the reciprocal method. What is the amount of service department costs that will be allocated to each of the operating departments?

f. Suppose the CFO tells the accountant to use the method that allocates the highest cost to the Government Department each period. Would this be ethical?

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Supplying Department Contracts (contracts).. IS (employees).. Direct cost Using Department Government 36% 30% $320,000 Contracts IS 0% 10% 20% -0- $36,000 $133,600 Commercial 54% 50% $620,000