AC505 Unit 3 Service Department Cost Allocation Example

Course	AC505 Advanced Managerial/Cost Accounting
Unit	Unit 3
Paper type	Cost allocation exercise
Length	About 560 words, 5 pages double-spaced
Format	APA 7 student paper
School	Purdue University Global
Program	MS in Accounting
Updated	October 2026

Free sample paper for AC505 Unit 3

Three Methods, Nearly the Same Answer, a Different Decision: A Unit 3 Service Department Cost Allocation Exercise

[Student Name]

Purdue University Global

AC505: Advanced Managerial/Cost Accounting

Unit 3 Cost Allocation Exercise

[Instructor Name]

[Date]

Harrow Creek Nut Company, its departments, the outside lab and every figure are composite; the textbooks cited are real.

What this part is doingStating the methods, the small spread and the bid in the lead shows the exercise's real question.

The Service Matrix

Maintenance costs $720,000 a year. It gives 10 percent of its hours to the lab and 45, 30 and 15 percent to roasting, the butter line and the bar line. The food safety lab costs $480,000. It spends 20 percent of its testing on maintenance, checking lubricants and sanitation on equipment, and 25, 35 and 20 percent on the three operating departments.

Direct Method

The direct method ignores the services the two departments give each other and allocates each one's cost only to the operating departments, in proportion to their shares. Maintenance's $720,000 goes out over the 90 percent used by operations; the lab's $480,000 over its 80 percent. Roasting receives $510,000, the butter line $450,000 and the bar line $240,000.

Step-Down, Maintenance First

Maintenance's cost is allocated first, including $72,000 to the lab, which then has $552,000 to allocate to operations. Roasting receives $496,500, the butter line $457,500 and the bar line $246,000.

Step-Down, Lab First

The lab's cost is allocated first, including $96,000 to maintenance, which then has $816,000 to allocate. Roasting receives $528,000, the butter line $440,000 and the bar line $232,000. The order changes roasting's share by $31,500, which is why the step-down method needs a stated, consistent rule for sequence (Datar & Rajan, 2021).

Reciprocal Method

The reciprocal method, the most complete of the three because it recognizes both exchanges at once (Kaplan & Atkinson, 1998), solves two equations: maintenance's total cost equals $720,000 plus 20 percent of the lab's total, and the lab's total equals $480,000 plus 10 percent of maintenance's. Maintenance's total is $832,653 and the lab's $563,265. Allocating those totals by the full matrix gives roasting $515,510, the butter line $446,939 and the bar line $237,551.

For product costing the four methods tell almost the same story, but the reciprocal method's $563,265 for the lab is the number most likely to mislead a make-or-buy decision, because it includes maintenance work that will not go away if the lab does.

What this part is doingThe highlighted sentence separates allocation accuracy from decision relevance, the point graders look for in this exercise.

Decision Note: The Outside Lab's Bid

An outside laboratory has offered to perform all the tests, including those for maintenance, for $455,000 a year. Comparing the bid with the reciprocal cost of $563,265 suggests a saving of about $108,000. That comparison is wrong.

If the lab closes, the company saves the lab's own costs that are avoidable. Of the $480,000, $40,000 is a lease on testing equipment with two years to run, which continues either way, so $440,000 is avoidable. Maintenance's work for the lab, the $83,265 included in the reciprocal figure, would not be saved; maintenance staff stay and their hours shift to other equipment. Against a bid of $455,000, closing the lab would cost about $15,000 more a year until the lease ends, and save about $25,000 a year afterward, if no quality or turnaround cost is added.

The qualitative case matters more than either figure: an in-house lab releases lots the same day, and an outside lab's turnaround could hold product on the dock (Hilton & Platt, 2020).

What this part is doingEnding on avoidable cost and turnaround shows the exercise moves from allocation to decision correctly.

References

Datar, S. M., & Rajan, M. V. (2021). Horngren's cost accounting: A managerial emphasis (17th ed.). Pearson.

Hilton, R. W., & Platt, D. E. (2020). Managerial accounting: Creating value in a dynamic business environment (12th ed.). McGraw Hill.

Kaplan, R. S., & Atkinson, A. A. (1998). Advanced management accounting (3rd ed.). Prentice Hall.

Reading the AC 505 Unit 3 instructions

The third AC505 unit asks you to allocate service department costs by several methods and interpret the results. Set out a service matrix showing what share of each service department's output goes to the other service departments and to operating departments. Allocate by the direct method, then by the step-down method in both possible orders, then by the reciprocal method, solving the simultaneous equations. Compare the results and explain why they differ, including why order matters in step-down. Then apply the results to a decision, such as an outside supplier's bid, and show which costs would actually be avoided if the service were outsourced, separating them from allocated costs that would remain. Include qualitative factors. Cite recognized cost accounting texts in APA 7.

Inside the AC505 Unit 3 example

The sample's matrix shows maintenance giving 10 percent to the lab and 45, 30 and 15 percent to roasting, butter and bars, and the lab giving 20 percent to maintenance and 25, 35 and 20 percent to operations. The direct method allocates $510,000, $450,000 and $240,000. Step-down with maintenance first gives $496,500, $457,500 and $246,000; with the lab first, $528,000, $440,000 and $232,000. The reciprocal method solves for totals of $832,653 and $563,265 and allocates $515,510, $446,939 and $237,551. The highlighted sentence warns that the reciprocal lab total misleads a make-or-buy decision. The decision note finds only $440,000 avoidable against a $455,000 bid and stresses lab turnaround.

Where the points sit in the AC505 Unit 3 rubric

Allocation exercises in AC505 earn points for correct computation under each method and for applying the results properly to a decision. Graders check the matrix, the arithmetic, the reciprocal equations and the totals for each operating department. The rubric rewards explaining why step-down order matters and why the reciprocal method is most complete. Significant credit goes to recognizing that allocated totals, even reciprocal ones, are not avoidable costs: services received from another department and committed costs such as leases often remain after outsourcing. Qualitative factors should be specific to the service. Answers that compare a bid with an allocated total, or that solve the reciprocal method incorrectly, fall well short. Each method's source belongs in an APA 7 reference list.

AC505 Unit 3 help: mistakes that cost points

Common Unit 3 errors include running step-down in only one order, so the effect of sequence goes unseen. The reciprocal equations are set up with the shares reversed. Students assume the reciprocal method is always the right answer for every purpose. The outsourcing comparison uses the allocated total rather than avoidable cost, overstating savings. Unavoidable costs, such as a lease, are forgotten. Turnaround, quality and control are not discussed. If your section's case involves different service departments, such as IT and human resources at a hospital, a writer can build the matrix, run all methods and apply them to your decision.

Get an AC505 Unit 3 example written to your instructions

Service percentages and department costs from the Unit 3 case are all the figures needed, plus a note of which methods your instructions call for and the rubric. Every required method is then computed, the step-down order defended and any outsourcing question answered on avoidable cost, within 24-48h and free for a first sample. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.

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AC505 Unit 3 questions, answered

Why do the reciprocal totals exceed each department's own cost?

Because each service department's reciprocal total includes the services it received from the other. Maintenance's 832,653 dollars is its own 720,000 plus its share of the lab's work. The excess is internal exchange, not new cost, and it cancels out: allocations to operating departments still sum to 1,200,000. Checking that total is the quickest proof the equations were set up correctly.

Which department should go first in step-down?

Common conventions start with the department that serves the other the most, measured by cost or by share of output, or with the one whose own costs are largest. The choice should be stated and defended, because the order changes the results. Running both orders, as this sample does, shows how much the convention matters in the specific plant.

Is the reciprocal method always the best choice?

It is the most complete, since it recognizes every exchange between service departments, and it clarifies what an outside supplier would have to replace. For routine product costing, where differences are small, many firms accept direct or step-down to save effort. A good answer matches the method to the decision rather than ranking methods in the abstract.

Where can I find a free AC505 Unit 3 sample paper?

This page holds a full AC505 Unit 3 cost allocation exercise for Harrow Creek Nut Company with direct, step-down in both orders and reciprocal allocations, an outsourcing test and APA 7 references.

Why is the reciprocal lab total not the cost the company would save?

It includes $83,265 of maintenance work that would continue if the lab closed, and the lab's own $480,000 includes a $40,000 lease that runs two more years. Only $440,000 is avoidable, less than the $455,000 bid.