BluStar Company has two service departments, Administration and Accounting, and two operating departments, Domestic and International. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of BluStar operations follows:

Administration Accounting Domestic International
Employees – 29 40 31
Transactions 38,000 – 19,000 76,000
Department direct costs $ 350,000 $ 147,000 $ 950,000 $ 3,750,000

Allocate the cost of the service departments to the operating departments using the direct method.

The Direct Method used for allocating Services Departments Cost to Operating Departments ignores the services used by service departments and allocate costs just to operating departments based on each department's consumption of allocation base. So, the costs of Administration and Accounting departments will be allocated to Domestic and International Departments.

Allocation of Administration Department Cost:

Domestic

Direct Cost of Administration * (No. of Employees in Domestic / Total No. of Employee in Operating Departments)

⇒ 350,000 * (40 / 71) = $197,183.

International

Administration Cost Allocated = 350,000 * (31 / 71) = $152,817.

Allocation of Accounting Department Cost:

Domestic

Direct Cost of Accounting * (No. of Transactions in Domestic / Total No. of Transactions in Operating Departments)

⇒ 147,000 * (19,000 / 95,000) = $29,400.

International

Accounting Cost Allocated = 147,000 * (76,000 / 95,000) = $117,600.