Oak haven Financial Planners has four service centers and three revenue centers.

Oak haven Financial Planners has four service centers and three revenue centers. In order of use, the service centers are Administration, Information Services, Customer Service, and Client Accounting. The three revenue centers are Insurance, Investments, and Financial Plans.

Administration’s costs are assigned based on percentage of time spent. Information Services’ costs are assigned based on the percentage of computer and Internet access time. Customer Service’s costs are assigned based on percentage of clients. Client Accounting’s costs are assigned based on the percentage of client transactions. Statistics for the service and revenue centers appear at the top of the facing page.

Managers’ report these indirect costs for their departments:

 

Administration

$ 2,500

Information Services

1,800

Customer Service

5,000

Client Accounting

1,000

Insurance

2,600

Investments

8,000

Financial Plans

2,400

Total

$23,300

 

Percentage

 

of Time

of Access

of

of Client

Labor

Center

Spent

Time

Clients

Transactions

Hours

Administration

5

15

Information Services

6

5

Customer Service

25

25

Client Accounting

4

12

Insurance

25

13

20

25

830

Investments

15

20

60

70

500

Financial Plans

20

10

20

5

664

Total

100

100

100

100

1,994

Required

1. Use the direct method of cost allocation to determine the three revenue centers’ overhead costs.

2. Use the step method of cost allocation to determine the three revenue centers’ overhead costs.

3. Prepare departmental overhead rates for Insurance, Investments, and Financial Plans, assuming that the direct method of cost allocation is used and that the activity base is labor hours.

4. Prepare departmental overhead rates for Insurance, Investment, and Financial Plans, assuming that the step method of cost allocation is used and that the activity base is labor hours.

5. Manager Insight: Did the departmental overhead rates computed using the direct method and the step method of cost allocation differ? Why?

 

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