$14-28$ Support division cost allocations; single$-$division cost pools; direct, step$-$down, and reciprocal methods. The Manes Company has two products. Product $1$ is manufactured entirely in Division X$.$ Product $2$ is manufactured entirely in Division Y$.$ To produce these two products, the Manes Company has two support divisions: A $($a materials$-$handling division$)$ and B $($a power$-$generating division$).$

An analysis of the work done by divisions A and B in a typical period follows:

Used By Supplied By A B X Y A $-100250150$ B $500-100400$

The work done in Division A is measured by the direct labour$-$hours of materials$-$handling time. The work done in Division B is measured by the kilowatt$-$hours of power. The budgeted costs of the support divisions for the coming year are:

Division A $($Materials Handling$)$

Division B $($Power Generation$)$

Variable indirect labour and indirect materials costs

$$70,000$ Supervision $10,000$ $$10,000$ Amortization $20,000\_10,000$ $$100,000\_\_20,000\_+$ Power costs $+$ Materials$-$handling costs

The budgeted costs of the operating divisions for the coming year are $$1,500,000$ for Division X and

$$800,000$ for Division Y$.$

Supervision costs are salary costs. Depreciation in Division B is the straight$-$line depreciation of

power$-$generation equipment in its nineteenth year of an estimated $25-$year useful life; the equipment is old

but well maintained.

Required

What are the allocations of costs of support divisions A and B to operating divisions X and Y using

$($a$)$ the direct method, $($b$)$ the step$-$down method $($allocate Division A first$),($c$)$ the step$-$down method

$($allocate Division B first$),$ and $($d$)$ the reciprocal method?

An outside company has offered to supply all the power needed by the Manes Company and to provide

all the services of the present power division. The cost of this service will be $$40$ per kilowatt$-$hour of

power. Should Manes accept? Explain.