Clean Tube Laboratories (CTL) contracts with area hospitals to perform various lab tests for outpatients. CTL is organized into four departments – two support departments (Maintenance and Administration) and two patient departments (Traditional Tests and DNA Tests). The traditional tests department tends to be more labor-intensive, while the DNA Tests department is equipment intensive.

As a part of a push to convert to a responsibility accounting system, management wants to determine the total costs to operate the Traditional Tests and DNA Tests departments. Management wants to allocate, to the two patient departments, the Maintenance department costs based on the depreciation dollars and the Administration department costs on the basis of labor hours recorded by employees in each department.

The following data (with dollar amounts in thousands) appear in the organization’s records for the current period: 

Department	Total Costs	Labor Hours	Depreciation $ (included in total cost)
Maintenance	$10,000	1,000	$1,000
Administration	$15,000	2,000	$2,000
DNA Tests	$30,000	3,000	$8,000
Traditional Tests	$40,000	4,000	$5,000
Total	$95,000	10,000	$16,000

1. Allocate the support department costs to the patient departments using the direct method.

2. Allocate the support department costs to the patient departments using the step-down method and starting with the Maintenance Department

3. Allocate the support department costs to the patient departments using the reciprocal method (Hint: As an alternative to developing and directly solving for variables in four cost equations via substitution method, the reciprocal solution can be easily accomplished by creating a four-by-four matrix using the Excel "Minverse" command to obtain solution parameters for the four variables. The four-by-four inverted matrix can then be multiplied by the one-by-four cost matrix using the Excel "Mmult" command to obtain the final allocations in dollars.) 

4. What would be the next steps to put the new cost information to use? 

Answer rating: 100% (QA)

Direct method Allocation ratio DNA Trational Maintenance 0615384615 0384615385 800013000 500013000 Administartion 0428571429 0571428571 30007000 40007... View the full answer